When I try this it appears to work
Yes, but it is dangerous. You cannot use more than the first 4GB of the drive. If you fill up the second or third partition, one day your first partition will loose all its data because it is overwritten by the other partitions.
You should create a 900 MB boot partition and two 1500 MB data partitions for now and leave the rest empty, then your data is safe.
when I am installing OS3.1 when it gets to the fonts, it says there is not enough room to install the fonts
That's not related to the above. This message appears because there is more than 2 GB free. These high numbers appear to be negative for the installer. Make smaller partitions, then this will not happen. Or fill the partition until less than 2 GB remains.
(or install NSD?)
NSD does not help for >4GB. Actually it does not do anything useful.
I've got a 80 gig drive and I'm using NSD and smartfilesystem without any issues
I am sure there is something else in addition which you use, because even with NSD it is not possible to access more than the first 7.8 GB of the drive.
NSD just translates TD64 commands into HD_SCSICMD, but the hardware access is still done by the original driver and this original driver can only see 7.8 GB.