To solve the problem when I was running a dual boot I simply made a small VFAT partition to use as a file transfer and common file partition. This partition could be read and written from Linux and Windows. I did the same thing when I was running my business using OS/2 as its operating system.
This is no longer needed, Simply install ntfs-3g and establish your Windows partitions as filesystem ntfs-3g, In my Mandriva 2008.1 system I no longer have or need a VFAT partition.
The problem was with Windows, not Linux. So far as Linux is concerned, it can read and write the ntfs-3g partition as if it were a native Linux partition. Windows thinks that the ntfs-3g partition is just a ntfs partition and thinks that the Linux partitions do not exist.
The issue was not reading, as i used the ntfs-3g, driver but R+W, as Linux locked me out of modifying my own files, and right clicking to gain permissions was in vain. As detailed, freeware is available to R+W to Linux from Windows, but i have not found a script that would allow full R+W privileges to my Windows drives.
Your VFAT solution is good, as what i do in dual booting Vista and XP is to share the same Firefox profile (actually, 2, as i run 2 instances of FF at once) folder between both, as well as the auto correct file (etc.) for Open Office. If i used a Fat32 drive or partition and put them in that, then i could configure Linux to share that. But finding how may take some time. Looking for more drive space as it is right now.
As far as Windows not recognizing Linux, XP also does not recognize the Vista system restore point files, and deletes them when you boot into it.