I have to say it's a pretty unusual problem - just not something I've heard of before. It really should boot either way! If anything it's much harder for it to boot externally than internally...

Yep
 

I can't agree with you more, Dave. This is exactly why we're pretty :confused:

I think I am going to get the laptop replaced and if the drive fails on the new one too, we'll probably blame the Hitachi Travelstar 320 GB 7200 RPM disk.

But the drive did work when you just installed Snow Leopard to it, no? So... I just don't get it.

No
 

The drive when placed inside the computer acts weird in many ways:
- does not let disk utility erase/partition it (hangs and sometimes errors)
- does not let the OS-X installer install to it (hangs after a minute)
- does not boot up even if it has a fresh copy of OS-X

The same drive when placed outside using USB or Firewire does everything normally.

Interesting. OK - yeah, sounds like a drive issue. Very weird!

Final Update
 

I did get a laptop replacement and after putting in the Hitachi Travelstar 320GB 7200RPM drive in it, the same behavior was observed. I have concluded that the problem is with the drive when placed internally on the Macbook Pro.

The same drive works just fine with the Black Macbook which I am upgrading from.

Dave, thanks for your help!

It doesn't surprise me that the replacement MBP showed the same behavior - that was a bit of a hail mary pass on the part of the AppleCare guy. Very strange that the drive seems incompatible, though! Maybe it's just that one sample?