Here are instructions on how to install osx from a external firewire hard drive.
How to install OS X from a Partition, External Firewire Drive, Second Computer in FireWire Target Disk Mode, or iPod
USB will not work
1. Mount your partition, external firewire drive, second computer in FireWire Target Disk Mode or iPod as a volume on your desktop and make sure you have at least three gigs of free space available.
2. Launch /Applications/Utilities/Disk Utility
3. In the left window of Disk Utility, select the volume mounted on your desktop that you want to install from.
4. Click Restore tab (upper right of window).
5. Drag the icon (left window) of the volume you want to restore from [Example: Tiger.iso or Tiger.dmg] to the Source field. (.iso & .dmg are both disk image files)
6. Drag the icon (left window) of your partition, external firewire drive, second computer in FireWire Target Disk Mode or iPod to the Destination field. You have a choice to checkmark "Erase Destination" so that it will erase the volume first, before restoring the installer onto that volume. If you do not wish to erase the volume and you want to keep your existing files on that volume, do not checkmark the "Erase Destination" option. Erasing a volume results in a clean volume. Erase Destination is NOT necessary, just be sure you have at least three gigs of free space available on that volume first or errors will result.
7. Click the Restore button (bottom right).
8. Go to Finder and rename your "Destination Volume" to: Mac OS X Install DVD
9. Go to the Apple in the upper left corner of the menu bar at the top. Scroll down to System Preferences. In the fourth row down select Startup Disk. Select the Mac OS X Install DVD.