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When installing Windows XP from scratch, you are prompted to select from two different file systems: FAT32 and NTFS. However, it gives no real reason why you should select one or the other, and defaults to NTFS. Here are some things to consider when deciding between FAT32 and NTFS.
FAT32
If you're installing on a dual-boot system where you would have a FAT32 partition (default type for Windows 98 and SE for partitions over 2GB), you may run into problems depending on your situation. The FAT32 file system was created when the size of hard drives exceeded 2GB. The previous file system for DOS and Windows 95 was FAT16, which offered at most 2GB of allocation on your hard drive. This of course is useless for today's hard drives when you can't find anything under 10GB anymore. Where FAT16 allowed a 2GB maximum, FAT32 only allows a 32GB maximum. If your hard drive is over 32GB, you'll have to split it into separate partitions, or use NTFS.
NTFS
NTFS was introduced with Windows NT. Among the reasons why it was introduced, it allowed partitions greater than what's even offered today, and boasts better performance and security. Focusing on security, it's possible that while an NTFS hard drive is secure when running Windows XP, there's no easy way to get back into the hard drive if you boot from an emergency floppy that only sees a FAT16 or FAT32 partition, such as what you'd get from a 98 or ME emergency floppy.
The security in NTFS actually prevents you from circumventing its own file system from a boot floppy. This means that if for some reason your hard drive becomes unusable and you need to move data off of it, the task won't be as easy as it was when using Windows 95, 98, and ME. The solution that the user has in this situation is to boot from the Windows XP CD and run a repair on the hard drive. This should fix any problems the user had with the system and bring it back to a bootable state.
The other issue is in dual-boot situations. Running under NTFS, you can see FAT16 and FAT32 partitions, but if you boot back into Windows ME, you can't see the NTFS partition. This is a problem if you downloaded something to your XP partition and you want to move it to your ME partition while running under ME. Also, if you upgraded ME to XP and you convert your file system from FAT32 to NTFS, you cannot go back to Windows ME since ME can't run under NTFS. However, only NTFS allows you to set permissions on individual folders so that you can control who sees what.
Converting from FAT32 to NTFS at a later time
If you want, under Windows XP you can convert your FAT32 partition to NTFS using the following command from your Command Prompt:
convert c: /fs:ntfs
Conclusion
With all this information, find what suits your needs and go with it. If you're the kind of person that backs up regularly, go with NTFS. Same if you want to use a partition over 32GB without partitioning. If you want to play it safe, or if you want the ability to transfer files from one partition to another under a dual-boot situation, stick with FAT32.
