This is good to a certain point since 3D acceleration is limited in virtual machine booting, at least it was last I checked. So long as the majority of the games aren't graphics hogs a virtual machine is a good idea.
As for NTFS vs FAT32 in Windows 98, I've recalled that you can install drivers to allow 98 to use/see NTFS without significant issue. It's been years since I've done it but if you look around, you should be able to find some information concerning this.
For example: http://www.techrepublic.com/article/...driver/1047598
Even then if you would rather format back to FAT32, that too is an option. The bottom line is that Windows 98 SE is not a bad choice.