Taken from Windows 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.
Whether a partition is formatted with NTFS or converted using the convert command, NTFS is the better choice of file system. For more information about Convert.exe, after completing Setup, click Start, click Run, type cmd, and then press ENTER. In the command window, type help convert and then press ENTER.
In order to maintain access control on files and folders and support limited accounts, you must use NTFS. If you use FAT32, all users will have access to all files on your hard drive, regardless of their account type (administrator, limited, or standard.)
NTFS is the file system that works best with large disks. (The next best file system for large disks is FAT32.)