It very much sounds to me like a hard disk with bad sectors, a flaky drive PCB, drive cable, or (worst case scenario) onboard IDE controller. The last seems unlikely, as you have no trouble with the CD drive.

I think booting from an external drive is a pointless diagnostic step, as you've already established that it boots OK from something. So I guess your next step is to get past those pesky screws after all. Any chance you'd be able to drill or Dremel them out?

Alternative thoughts:

• Replace the CD drive with an adapter for a second HD, or a CF
• Firewire target disk mode - boot it from a drive in another Mac, perhaps a 'book with a dead screen
• Small external FW drive - I've seen FW-CF adapters on ebay. Silent and portable.