James,
Yes, it does work. Perhaps you have never encountered such an issue, but I can reassure you that 3rd party software is not needed. My system is an example. Before installing Win2K, my system was a single partition. The key is to install Win98 or WinME first - you have to if you want separate partitions that Win2K can manage on its own. Then install Win2K.
gibber,
It doesn't really matter which file system you choose for Win2K. I would recommend NTFS, since it would give at least one of your partitions extra security for files you might want to keep away from prying eyes. ;-)
Just keep in mind that the NTFS partition cannot be accessed from WinME, but Win2K will be able to access both.
tek