Your problem is that the drive isn't in the correct format. Under the advanced options tab in the disk utility, select APM (apple partition map) and format it with that. If your drive is formatted in FAT, FAT32, NTFS, XFS,or GUID, mac OS X won't install. When you sellect "Mac OS Extended..." The utility doesn't automaticly change the system to APM (Apple Partition Map For PowerPC Based Macs[PowerPC 601 - G5]) or The GUID Partition Table (For x86 [Intel] Macs). Most new drives ship with NTFS, and FAT Filesystems for Windows, and x86 Linux, Mac OS X can reconize and mount NTFS Filesystems if that have "Mac OS Extended..." but cannot boot off of them.