Not sure which games you want to run. I'm guessing you want to run Windows games under Wine, as DOS games would be best simply run under DOS. If running Windows games you should be able to use a USB joystick and other soundcards, as the drivers should save you from needing actual SB hardware and an analog JS port. I can't say anything good about the Logitech USB joysticks though, they are poorly made and not durable. Maybe you can find something more suitable.

With PCI you could get an inexpensive SATA adapter and go that route, but it is a very old system to throw more money at.

Not sure why Debian would have any more of a resource load than Knoppix, particularly since Knoppix is made from Debian. Also not sure why you want to move beyond 7.2 CD. It isn't like someone with a PIII needs the latest software. Are you seeing more resource use under wine on Debian than under wine on Knoppix? It might just be that wine under Linux doesn't have the performance that you need on a PIII.

Klaus has always been upfront that Knoppix is intended as a Live CD (or DVD). The install is a compromise. I would advocate, if you want a hard disk install, Debian or other distros intended for hard disk install. You might like the 32 bit version of LinuxMint (although I think it is a 1 gig + ISO), or even Ubintu (rumored to be an African word meaning "I can't figure out how to install Debian").

Good Luck.