First of all, it is required that you mobo can boot from a drive connected to the USB port. Not all mobos/bioses support this. Check this before proceeding.
In order to install the OS to the drive, you most likely will need a driver disk in order to make the install program recognise your external drive. The proceedure is similar to the one used when installing the OS on a RAID array. You will need a floppy with the drivers, and when the install program prompts 'Press F6 to install additional drives ..' (or words to that effect) you press F6 and insert the floppy.
Just curious. Why do you want to put the OS on an external drive?
<i><b>Engineering is the fine art of making what you want from things you can get</b></i>