Ypi can indeed boot an xbox without an hdd but you will not get far. You will get an error code after the flubber animation (the one that starts as something and becomes an X :P).
The beep between each flash is kinda strange as I have never heard of that before. Green/red flashing is called "frag" and can occur for different reasons.
And as you say it occurs when the HDD is plugged in. That should make the HDD faulty yes.
The fact that it does boot and then frags can be seen as uhhhm... Good or something...
Because then the PSU is working to power it up atleast.
On the other hand some recistor could have gone bust in the 'cloud' and therefore making a hard time for the PSU.
Your friend talks about and mushroom cloud at the moment he plugged it in? Thats kinda strange actually. But what you can do is open up your xbox and take a look at the PSU. Check for a brand there and report back..
Frag is most often caused by bad chip or something similar. Any chip is not the problem right now as the chip has been moved. The D0 might have been damaged upon chip removal or similar though.
You say the xbox wont boot at all know when you have moved the chip. Then your old xbox is most likely to suffer from "console coma".
It is unknown why this happens but the eeprom get busted for no reason at all. I would say that it happened long before the cloud thing and that the chip kept you from noticing.
Please describe the "wont boot at all" thing a little more specific so I know what you mean... It is like "I press the power button nothing at all happen", "I press the power button it turns on, then off, then on again 3 times and then starts to frag" or something else?