Same version of Diskkeeper? Not that it matters it could simply be that it's reporting fragmentation differently on both drives. Maybe with the NTFS disk it's telling you to defrag as soon as it hits one level but is waiting for a much higher level with FAT32.
As Mik says there's really no huge difference in the speed that the two fragment at and since you should really defrag once a month it's pretty moot anyway.
Yes, version 8 in both cases. I have heard quite a few people complaining of this same issue on NTFS partitions though.
There is no way I can remember to do it every month.

I'm not even sure how much of a difference fragmentation makes for actual performance; I have never experienced the stutters or long access times that others talk about.
I've got no idea what you're doing wrong. I tried the example you gave of opening the system32 folder and it popped up in less than a second.
I looked into this a bit and it seems that there is a registry tweak to disable something that may be causing this, possibly what mikhael was talking about. Maybe you have activated that? I don't think I have, so I'm going to see if I can find out more about it.
Scandisk runs after every crash on winME so you probably would have seen it a lot
Remember that since it can't touch the final 20GB of your drive any errors on there would not have been fixed which means that all of a sudden you could lose something important. I think this is exactly the problem TopAce had with his drive a couple of months ago. (It was definately either the 127 or the 137GB limit he hit).
The Scandisk on startup feature can be disabled on Win9X systems without any weird hacking; there is an option in msconfig to do it. I think you're right about the 127GB limit with Scandisk, but I never used Scandisk as I said. The 137GB limit is a hardware issue and doesn't have anything to do with the file system.
The problem with disabling it is it's like cutting the seatbelts and airbags out of your car. Everything works fine until you have a big crash. 
I just use other software though, the stuff on the CD that came with my hard drive. There are lots of third party utilities that do a better job than Scandisk or Autochk.
FAT32 sucks for large numbers of files. It takes a full minute to open a folder containing 8 items, simply because one of those items happens to be the JDK1.5 documentation, ie. a very large directory tree. On NTFS, this problem doesn't appear.
I'm getting exactly the opposite effect. The windows\system32 directory on the main computer with an NTFS partitioned drive has about 2300 files and takes around 6.5 seconds to load the folder. On the laptop's FAT32 partition (on a slower, 5400rpm drive), the same folder has about 2100 files and it comes up immediately.
Maybe it has to something to do with the viewing program? I don't use Windows Explorer (and never will), but instead a third party thing called Turbo Navigator. I don't know how that would cause it, but I will try it in Explorer later and see if it still happens.