Installing Office 2003 and Office 2007 on the same system

The answer is yes, except for Outlook which as in previous versions get a little precious if this is attempted (it will not let you do this, btw). You can choose to have them both installed to the same drive or one to an external hard drive, it does not matter. The key option is when installing Office 2007 is to customise the options and select to NOT uninstall the previous versions.
When you install both copies of Office to be installed on 1 machine that switching between Word 2003 and Word 2007 will result in an install dialog box coming up. See How to get rid of the installer / configuration dialog when running Office 2007 and Office 2003 on the same system - for Vista and other versions of Windows to fix this.
For more support information, look at http://support.microsoft.com/default.aspx/kb/928091 which details the install order and any key requirements