you'll have to bear with me, because I never could see any point in dual booting windows.
But what I'd do, is go with the XP, it's more of the same, but it's up to date more of the same. Then, if you don't already have partition manager software (like partition magic) I'd go here
and get the freeware/shareware one.
I've got partition magic, so I cant say how easy/straight forward the ranish one is to use, but there should be some doc's/instructions.
Then resize the XP partition (oh, and I would imagine that as you say both your window versions are formatted as FAT32, then you should be able to copy across anything important that you want to keep - and the FAT32 thing is also good - more later). After resizing, you should be able to boot the knoppix and when it's up and running, open a terminal and you should (in theory) just have to type
which would then install it to the hard drive.
There's better advice/instructions here
as well as links for you to be able to get the very latest version (which is 3.3 IF you've got access to a burner).
A few other points are, that I don't know if knoppix will format the "new" partition or not (I suspect it will - you'd have to choose ext3 if available, though ext2 would do, there's other format types as well, but as I understand it, you'd be better off with ext3, ext2 or ReiserFS). Also, the bootloader. Knoppix, being debian based, lots of the "debian types" prefer GRUB, whereas I prefer Lilo - grub uses a different naming system that I've never managed to get my head round, hence I've always used lilo, with it's normal linux (i.e. hda1, hda2 etc etc) naming conventions.
If you repartitioned to say 20 gig's windows and 20 gigs for linux, then that should be plenty. If the knoppix want's to make a swap partition, it's normal to use twice the amount of physical ram that you have (i.e. I've got a swap, but only because one of my installed distro's wouldn't install without one and I use 1.5 gig's, because I've got 768 megs of physical ram installed - but I had mandrake (various versions) running for nearly 2 years without one).
The FAT32 thing is good, because linux can write to FAT32 formatted windows partitions - whereas, currently I understand that some distro's will read NTFS partitions (which is what XP is normally formatted as, though I'm presuming that because you run it with 98 FAT32 was easier), but not write - I've heard that there are projects in the pipeline about this.
If your relative lack of disc space is because you've filled the hard drive with stuff, then again, unless you've got some way of getting it to disc (CD's because in most cases floppy's would be a waste of time) then you could free up space that way. Failing that, it would mean a second or larger hard drive.
Finally, I believe that knoppix is almost as easy/good as mandrake for a first distro. Fractionally harder to use/learn/install than mandrake, but it's hardware detection is superior and your only possible problem would be your modem. You'll need to find out if it's going to be difficult. If you use dial up, then you should look into winmodems. Check the exact make and model, and then check out the biggest winmodem site to see if it's going to be compatible/configurable or not.
Hope this helps a little.