|Ii is not the source or destination files system that you should be concerned about but the Operating System controlling them.|
Windows XP will read, create and modify NTFS and Fat32. Win98 will only do Fat32. The two file system do not have to interact with each other.
>> It can't load/run .exe files from the old, they must first be copied to the new.
Not true. You can run an .exe file on a FAT32 partition using Windows XP installed on NTFS. What does need to be done though is that files need to be properly installed. Any failure for the file to work on an slaved FAT32 partition is more likely to be because of the change in the drive letter, nothing at all to do with the file system.
It is possible to install Windows XP on a FAT32 partition and it will still read and write NTFS partitions.