Ok, I run Knoppix from CD. I've installed Arial using the procedure you described, from my Win98SE partition. Here is a screenshot from KWord comparing the built-in font Helvetica and Arial, no anti-aliasing:
http://members.smartnet.ba/vedran/snapshot1.png
Here is the same file, with anti-aliasing:
http://members.smartnet.ba/vedran/snapshot2.png

This is a shot of this same file opened with my Red Hat 7.3, no anti-aliasing:
http://members.smartnet.ba/vedran/snimak1.png
For some unknown reason, I can't get aa to work in RH 7.3. Now, as you can see, in RH Arial is actually much prettier than Helvetica, which is good since Helvetica is a bitmap font and it's not available in some sizes (10, 13, etc.) While in Knoppix it's the other way. AA helps a bit, but it makes everything fuzzy and blurred and gives me a headache. Also it doesn't really solve some key issues, such as: in size 9 r is about as tall as the horizontal line in A, while with size 11 it's much taller; size 11 appears to be taller than size 12; there's a small pit on top of O and Q; size 11 A appears to be bold; etc. etc.
This is rather surprising, since people claim that font rendering has improved in RH 8.0?

Some people say that this is the trick:
http://www.cs.mcgill.ca/~dchest/xfthack/
Maybe someone should add this to Knoppix?