To choose a file system to use on Windows XP, Windows Vista, Windows Server2008, Windows 7, can be a difficult task. It is not just a one time decision, hence proper research will have to go into it. There are different factors which will have to be taken into consideration. Whether you upgrade your current installation, or you go in for a new file system, you will have to make this decision early in the process. Later, if you decide to add a drive or repartition an existing drive, you will have the same confusion all over again.
The maximum size of FAT volume is 2GB and it supports MS-DOS. It can be used for some dual-boot configurations. However, it is the backward compatibility due to which the question of its usage arises, other than for floppy diskette.
There is very little security in FAT32. If a user has access to a drive that uses this file system, then he also has access to all the files on that drive. On the other hand, the NTFS has permissions. It is seldom easy to implement these permissions but access to folder and files can be controlled individually, even to the extreme degree, when necessary. However, there is a disadvantage of the NTFS permissions. The chance for error and ruining the system is greatly magnified.
There are compatibility issues with NTFS volumes because they are not recognized by Windows 95, Windows 98, and Windows ME. This becomes a major concern when the system is set for multi-booting or dual booting. It is necessary that FAT32 is used for any drives which need to be accessed when the computer is booted from Windows 95, Windows 98, or Windows ME. Conversion of FAT and FAT32 to NTFS volumes is possible, however it cannot be done the other way round, without reformatting.
The beauty of NTFS is that it supports disk quotas, allowing you to control the amount of disk usage for every user. It supports file compression, whereas FAT32 does not. Space management is more efficiently done on NTFS as compared to the other file system. Cluster size has an important role to play in how much disk space is wasted in storing files. Smaller cluster sizes and less disk space is wasted in NTFS as compared to FAT32.
FAT32 file systems are more susceptible to disk errors. In case of errors, NTFS volumes retain the ability to recover from them. Log files are created under NTFS that are used for automatic repair of the file system. Another benefit of NTFS is that it supports dynamic cluster remapping for bad sectors and also prevents them from being used in the future.
After having read about both the file systems, you will have to decide on any one of them, depending on which of the two is well-suited to your working condition. An alternative will be to have both the file systems for multi-booting.