What processing overhead? The transactional nature of a journaled file system like NTFS or many Linux file systems probably makes it a higher processing load than any FAT file system. And the file system the vmdk is hosted on shouldn't have any effect on the processing overhead of the guest file system. FWIW, I don't imagine many people install anything in VMWare other than because they have something they need to do only in the guest OS they are running as a guest. I mean, I doubt the OP installed a Win98 guest so that it would be possible to run an application that would as easily have run on the host OS (or a better Windows version).