Depends:If,as you say,your 40GB drive has 37 GB used,then you might want to put it on the new drive.I'd just try it out from the CD and check it out before you tackle installing it to a hard drive.This way you dont fubar your system and you still get to try out a new OS.

As far as where to put it when your ready to install it,Linux doesnt really care where you put it.
Knoppix is great:it's the first Debian based distribution I've tried so far.I've been using Mandrake and SuSE for years,but there RPM based.But besides that,they're pretty similiar.
Good luck.
lynch