I am running Win 98SE on a P3-500.
There are considerations:
1) dual-boot system
Doable, useful and desirable, IMHO. Trying to duplicate Windoze in Linux is an exercise in futility, if for no other reason than Microsoft can change things at will, and emulation/guest O/S software is always playing catch-up.
2) only Linux: restricts what software I can download and install
Absolutely right. Even though a great variety of software is available for Linux, if it's not the software you want/need, that point doesn't count for much.
3) what flavour of Linux?
A lot depends on what you consider important. Many newcomers to Linux quite reasonably choose a distribution for ease-of-installation or similar considerations; SuSe, RedHat and Mandrake all shine here. Other users have specific requirements (must work with odd hardware or support real-time/embedded operation, for example) and choose other distributions. You can always try several distributions before deciding; check out
www.cheapbytes.com for very reasonable prices on Linux distributions.
4) download or off-the-shelf
Download is great for trials and experimenting; I prefer off-the-shelf when I've chosen a distribution, because I want to be sure I have a hard backup of the official distribution. In theory, it makes no difference; in practice, the extra documentation included in the off-the-shelf distribution may pay for itself many times over. Note that off-the-shelf does not have to mean retail; it's possible to purchase official distributions on CD only for nominal prices.
Hope this helps.