I had the same exact problem today and was fixed by doing the following:

1.) Boot into the recovery console of windows using the Windows XP Installation 
CD (hit R).
2.) In the console type fixboot and let it rewrite the mbr.

Thats what I did and now have it working perfectly using Grub.

-- 
Windows 2000 doesn't boot from grub: "Filesystem type unknown, partition type 
0x7"
https://launchpad.net/bugs/10661

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