I am trying to create a multiboot flash drive, but I don't want to use fat 16 due to the huge performance cliff between fat 16 and other file systems like ext 2 or NTFS. I need to have multiple linux distrosl on my flash drive and choose which one I want at boot-time (preferably grub2) All of the tools I found online require you to use an existing fat 16 partition.
Use a virtual machine or other *nix install to install GRUB2 on your flash drive. NTFS may work - there's a module for it in GRUB2, but you're right - most tutorials use VFAT.
Try MultiUSBBoot, Make a ~10mb FAT partition just for GRUB2, then format the rest to EXT2 or NTFS.
As I understands your requirement for a solution: You want a bootable usb stick with multiple linux distros on it.
You can solve this by using grub2, gparted, and dd/unetbootin.
1: format and partition your usb drive to the fit your distro needs
2: install grub2 on your usb device to enable distro selection on boot.
3: copy/install distros into partitions.
I did a similar thing a while back: https://github.com/magnuskiro/grubRescueDisk (I see that the readme needs some work, but at least you should be able to find something useful through the references.)
I have multiple (4 I think) partitions with different linux live images available on a usb stick.
I formate each partition with gparted and used grub2 as a bootmanager to select distro on boot.