Why won't my iMac start up from install disk?

I get a gray screen, apple logo in the center with a spinning gear underneath it.  I have started my computer holding the c key, the option key selecting the install disk and startup disk in system preferences.  The iMac hangs every time.  The hard drive is in need of repair.
thanks in advance
bradley

Funny you should mention that, as that happened a few months ago.  When it did, I could still start up from the install disk, there was just no destination for the software to be installed.  I am currently running the iMac off an external drive via firewire.  Disk utility informs me that disk is now in need of repair, even though it seems to be functioning fine, I can't start my machine from the install disk without it hanging up.

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