1. yes, Tiger is worth it....many new features, generally boots faster, more responsive.
2. If you're on Panther, you're firmware is probably allset. Check the Applesite to be sure, go to the support tab, and do a search. (lots of good info there BTW)
3. Yes, you can install OS9 on the empty drive, matter of fact it keeps things nice and clean if something goes wrong, and you need to reinstall. When OSX tries to start classic it will find the OS9 system folder, no problem.
Just put the OS9 CD in, doubleclick the installer, and after a couple of OK's or Agree's, it will let you choose where you want to install it. If you try to install on the same drive as OSX, then you must boot from the OS9 CD.