If your external drive has an empty bootable partition on it that you could use as the destination for your image, then you can do the image copy, install your new drive, boot from the external and transfer the image to the new drive.
If you don't have a bootable partition on your external, then it gets a bit more convoluted because you can't transfer an image back to the disk you're currently booted from...
Probably the easiest method:
- Boot from your install DVD
- Run Disk Utility and create an image file of your current hard disk on your external
- Replace the hard disk
- Boot from the install DVD again
- Run Disk Utility and format the new disk, then transfer the image back from your external onto the new hard disk
For $20 - $30 I'd get an enclosure, you can use your old disk in it if you want, once you're done