I have HDD0 C=NTFS (WinXP), D=FATS32 and HDD1 G=FATS32 (old Win98SE), H=FATS32 and I=FATS32 and have no problems copy data between them, E and F are DVD and CDRW. HDD0 is the master and HDD1 is the slave.
In the event that XP goes down I would boot Win98SE (removing the XP disk) after making it the master.
When I first set this up I did get Event Viewer errors 5 and 11 but a couple of safe boots cleared it.
I hope this helps.