Yes it does. I've had Steve Perry, Nikon and E.J. Piker of Naturescapes.net all confirm to me that it does work. I've seen it work with jpg and raw. I shoot totally raw all the time. Nikon told me the camera's software will apply all your settings to each and every shot. jpg or raw.
This would have no effect on a RAW file though.
Actually, your both right
If you use Nikon software or shoot Jpegs, the extra sharpening will be applied. However, third party software usually won't apply it.
Here's a quick shot I just did of my target to demonstrate. The first is the Jpeg and the second is the RAW shot in Lightroom. (sorry about the white balance.)
The Lightroom shot clearly isn't applying the sharpening. However, if I were to put the RAW into Capture NX, it would apply it and the RAW would look like the Jpeg.