One of the best things I've ever purchased is a dongle from Wiebetech which lets you connect a bare drive via firewire (of course, I used a firewire card in my Lombard to make the connection). Anyway, I just used my Lombard to run the CD and selected the "external" drive and installed it on there. The first thing I did, however, was use CarbonCopy Cloner to make an exact copy of all my OS 9 stuff. I then made two partitions on my "external" drive...one for OS X and one for OS 9. After I installed OS X, I used CarbonCopy cloner to bring everything in 9 over exactly as it was (saves time on reinstalling, etc.) I then unhooked the bare drive and swapped it out with the drive that was in my PB. I never tried installing OS X directly only because I had read that so many people had problems doing it. That's why I went this route.
Make sure you also include Mac OS 9 drivers if you plan on using Classic.