To                              NTFS or not to NTFS—that is the question. But unlike                              the deeper questions of life, this one isn't really                              all that hard to answer. For most users running Windows                              XP, NTFS is the obvious choice. It's more powerful                              and offers security advantages not found in the other                              file systems. But let's go over the differences among                              the files systems so we're all clear about the choice.                              There are essentially three different file systems                              available in Windows XP: FAT16, short for File Allocation                              Table, FAT32, and NTFS, short for NT File System.                              
                           
                          FAT16
                          The FAT16 file system was introduced way back with                              MS–DOS in 1981, and it's showing its age. It was designed                              originally to handle files on a floppy drive, and                              has had minor modifications over the years so it can                              handle hard disks, and even file names longer than                              the original limitation of 8.3 characters, but it's                              still the lowest common denominator. The biggest advantage                              of FAT16 is that it is compatible across a wide variety                              of operating systems, including Windows 95/98/Me,                              OS/2, Linux, and some versions of UNIX. The biggest                              problem of FAT16 is that it has a fixed maximum number                              of clusters per partition, so as hard disks get bigger                              and bigger, the size of each cluster has to get larger.                              In a 2–GB partition, each cluster is 32 kilobytes,                              meaning that even the smallest file on the partition                              will take up 32 KB of space. FAT16 also doesn't support                              compression, encryption, or advanced security using                              access control lists.
                           FAT32
                          The FAT32 file system, originally introduced in Windows                              95 Service Pack 2, is really just an extension of                              the original FAT16 file system that provides for a                              much larger number of clusters per partition. As such,                              it greatly improves the overall disk utilization when                              compared to a FAT16 file system. However, FAT32 shares                              all of the other limitations of FAT16, and adds an                              important additional limitation—many operating systems                              that can recognize FAT16 will not work with FAT32—most                              notably Windows NT, but also Linux and UNIX as well.                              Now this isn't a problem if you're running FAT32 on                              a Windows XP computer and sharing your drive out to                              other computers on your network—they don't need to                              know (and generally don't really care) what your underlying                              file system is. 
                           The                              Advantages of NTFS
                          The NTFS file system, introduced with first version                              of Windows NT, is a completely different file system                              from FAT. It provides for greatly increased security,                              file–by–file compression, quotas, and even encryption.                              It is the default file system for new installations                              of Windows XP, and if you're doing an upgrade from                              a previous version of Windows, you'll be asked if                              you want to convert your existing file systems to                              NTFS. Don't worry. If you've already upgraded to Windows                              XP and didn't do the conversion then, it's not a problem.                              You can convert FAT16 or FAT32 volumes to NTFS at                              any point. Just remember that you can't easily go                              back to FAT or FAT32 (without reformatting the drive                              or partition), not that I think you'll want to.
                           The                              NTFS file system is generally not compatible with                              other operating systems installed on the same computer,                              nor is it available when you've booted a computer                              from a floppy disk. For this reason, many system administrators,                              myself included, used to recommend that users format                              at least a small partition at the beginning of their                              main hard disk as FAT. This partition provided a place                              to store emergency recovery tools or special drivers                              needed for reinstallation, and was a mechanism for                              digging yourself out of the hole you'd just dug into.                              But with the enhanced recovery abilities built into                              Windows XP (more on that in a future column), I don't                              think it's necessary or desirable to create that initial                              FAT partition.
                           When                              to Use FAT or FAT32
                          If you're running more than one operating system  on                              a single computer , you                              will definitely need to format some of your volumes                              as FAT. Any programs or data that need to be accessed                              by more than one operating system on that computer                              should be stored on a FAT16 or possibly FAT32 volume.                              But keep in mind that you have no security for data                              on a FAT16 or FAT32 volume—any one with access to                              the computer can read, change, or even delete any                              file that is stored on a FAT16 or FAT32 partition.                              In many cases, this is even possible over a network.                              So do not store sensitive files on drives or partitions                              formatted with FAT file systems.
Source : FreePCTech