I can also confirm this works, although not well.
As soon as you give the OS a fair amount of filesystem activity (ie decompressing, installing etc.), it locks up. Vmware complains about something related to filesystem activity/read&write/something (can't remember, really), and the only option is to turn the virtual machine off at this point.
This is only my experience, of course. I have only tested this on Linux with host filesystems reiserfs and ext[3,4], and have not used a dedicated hard drive, only seperate partitions.
It's probably worth noting that it was also under Arch Linux, which requires a certain "hack" for installing VMware (Vmware requires sysv init scripts, Arch uses BSD-style).