2. WHICH SYSTEM TO USE?
There are three considerations that affect which file system should be chosen for any partition:
Do you want to use the additional capabilities that only NTFS supports?
NTFS can provide control of file access by different users, for privacy and security. The Home Edition of Windows XP only supports this to the limited extent of keeping each user's documents private to him or herself. Full file-access control is provided in Windows XP Professional, as is encryption of individual files and folders. If you use encryption it is essential to back up the encryption certificates used -- otherwise, if the partition containing your "Documents and Settings" has to be reformatted, the files will be irretrievably lost.
Considerations of Stability and Resilience
NTFS has stronger means of recovering from troubles than does FAT. All changes to files are "journalized," which allows the system to roll back the state of a file after a crash of the program using it or a crash of the system. Also, the structure of the file system is less likely to suffer damage in a crash, and is therefore more easily reinstated by CheckDisk (CHKDSK.EXE). But in practical terms, the stability of FAT is adequate for many users, and it has the benefit that a FAT partition is accessible for repair after booting from a DOS mode startup floppy, such as one from Windows 98. If an NTFS partition is so damaged that it is not possible to boot Windows, then repair can be very difficult.
Considerations of economy and performance
In a virtual memory system like Windows XP, the ideal size of disk clusters matches the internal "page size" used by the Intel processors -- 4 kilobytes. An NTFS partition of almost any size you are likely to meet will use this, but it is only used in FAT32 up to an 8 GB partition. Above that, the cluster size for FAT increases, and the wastefulness of the "cluster overhang" grows.
On the other hand NTFS takes much more space for holding descriptive information on every file in that file's own block in the Master File Table (MFT). This can use quite a large proportion of the disk, though this is offset by a possibility that the data of a very small file may be stored entirely in its MFT block. Because NTFS holds significant amounts of these structures in memory, it places larger demands on memory than does FAT.
Searching directories in NTFS uses a more efficient structure for its access to files, so searching a FAT partition is a slower process in big directories. Scanning the FAT for the pieces of a fragmented file is also slower. On the other hand, NTFS carries the overhead of maintaining the "journalized" recovery.
Also, of course, in a dual boot system, there may be the overriding need to use FAT on a partition so that it can also be read from, say, Windows 98.