Meltdown... Could this be the end?

[ScottyChoc]

Some weeks ago after restarting my Mac Pro it would only boot to a blue screen with no login window. I have been able to start in safe mode and even work productively minus the the ability to use video, peripherals, audio, and my font collection. I have tried several suggested solutions to this problem with no avail... disc utility as well as some commands entered in single-user mode to reset all preferences and application settings. No luck. Here's some info

Mac OS X
10.5.8
2 x 2.66 GHz Dual Core Intel Xeon
4 GB 667 MHz DDR2 FB-DIMM
500 GB HD 59 GB available space.
(second HD and DVD-RW have been non functional for about a year.)

I need to perform a full reinstall but because my DVD drive is non functional I am attempting to run the startup disc from an external DVD drive (HP dvd1040e). The drive works in safe mode and I can open it to see its contents. When I attempt to start from the disc (holding d during startup), it crashes into a gray screen with a restart warning during the boot process. I was able to remove the drive and restart again into safe mode. I was also able to boot into Apple Hardware Test from the disc and run it with no problems found.

I have backed up all of my files onto another external drive so I am prepared to wipe the HD and do a completely clean reinstall. I have never actually done a reinstall on a Mac so I don't know what I can do to remedy this somehow. Is there another technique to starting from and external DVD drive? Is it worth downloading the OS X install files to a flash drive or external hard drive to try from there? Things seem to get worse at every turn, any help I could get with this would be so greatly appreciated!

My nearest Apple store is over 2 hours away, I could go if I absolutely needed to but I would like to avoid it at all costs.