Install OS X From External Drive?

You can boot from a firewire drive, I believe. I don't know if that helps.

 

I know you can restore the external USB using the disk image as the source and use that as a startup disk, but I don't know if it's possible to use just a disk image as the startup disk.

 

You can create a DMG image of your installation media. Then use Carbon Copy Cloner or Super Duper to "clone" that disk to a partition on a USB drive. Not even sure the intermediate DMG is required.

I did this, and it's most excellent! (grin). I created 2 10GB partitions on an old 60GB USB sata drive, with the remaining space (~35GB?) as a third partition. Then I transferred the Disk 1 DVD to partition #1, Disk 2 DVD to Partition #2, and the latest Combo Update to Partition #3. I didn't even try to make my partitions optimized in size, just rounded them up to 10GB each.

The great thing here is that when you boot from the USB drive, it mounts all 3 partitions. So instead of asking you for Disk 2, it ~just finds it~ as the mounted Partition #2, and does the installation without stopping.