From XP Help and Support
NTFS is more powerful than FAT or FAT32, and includes features required for hosting Active Directory as well as other important security features. You can use features such as Active Directory and domain-based security only by choosing NTFS as your file system.
It is easy to convert partitions to NTFS. The Setup program makes conversion easy, whether your partitions used FAT, FAT32, or the older version of NTFS. This kind of conversion keeps your files intact (unlike formatting a partition). If you do not need to keep your files intact and you have a FAT or FAT32 partition, it is recommended that you format the partition with NTFS rather than convert from FAT or FAT32. Formatting a partition erases all data on the partition and allows you to start with a clean drive