I just grabbed a 40gb drive out of a external case that I have here and formatted it to the fat32 and then installed dos 7.1 onto it by hooking it up to my desktop as the master via the 2.5 to 3.5 adapter. Then put it in a laptop and it worked! I then stuck it in the other laptop and again it worked. I knew that this tutorial looked like should work, but couldn't believe two drives would fail in the same way and that they working before I started this project. Oh well, Now I'm off to tell my boss that we need to either pitch these laptops or buy two hard drives for them.
It sucks that I have to deliver the bad news to my boss, but it's a relief to finally know for sure what's happening. I've been beating my head against the wall on this problem for about a week now.
Thanks for your help on this.