A VM will present a different set of hardware to the OS compared to the real machine and Winders Product Activation will throw a hissy fit.
That said, I used to run W98 and W2K under VMWare 1.x without much trouble. VMWare 2 was a rushed to market bloated pig which pretty much made running from a native partition impossible. I've given up on it after trying several point releases (almost full CD download needed every time).
After that, I tried VirtualBox-OSE but that one just eats the CPU and any attempt to fix that made Winders unbootable. AFAIK, the OSE variant has limited or no USB support.