File System

1) I don't think you can convert FROM NTFS to FAT32, only the other way around.

2) There are a few threads here that deal with NTFS file system quirks (or bugs as ome prefer to put it) and generally I don't recommend NTFS for a home computer, as you have lots more problems if you have a logical crash of some kind. For your case, however, a switch to FAT32 will probably include either a total rebuild from fdisk and format or the application of a third party file system tool  - in which case you should proceed with the utmost care and prepare for disaster. Actually the choice between third party and rebuild is a toss up, IMHO - I'd prefer a clean start anyday.
/RID

Convert to NTFS: (and not vice versa :P)
http://support.microsoft.com/default.aspx?scid=kb;en-us;307881&sd=tech

# You can use the convert command (Convert.exe) to convert an existing FAT volume or FAT32 volume to NTFS. Because this conversion retains all your files (unlike a format operation), use Convert.exe when you want to keep existing files on your volumes intact.
# The conversion to NTFS is a one-way process. After you convert a drive or a partition to NTFS, you cannot convert it back to FAT or to FAT32. To restore the volume to the previous file system, you must reformat it as FAT or as FAT32. This action erases all existing data including your programs and personal files. In this case, you must either restore your data from a backup, or reinstall your operating system and programs.

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One thing.
You need to use FAT32 if you plan to use your HDD for more than 1 system.
(for transfer purpose maybe). Because FAT32 is more compatible with any computer.
Well I got my lesson when I try to plug in my NTFS HDD into my friend comp and take it back then realize that my files isn't recognized anymore !
My NTFS HDD suddenly changed into FAT32 by itself.
Strange eh ? But it does happened -.-

Gd luck with your choice :)

For FAT32 vs NTFS I'd ask what's most important to you, security or ease of recovery+performance? Using a Win98 bootdisk you can pretty easily recover files from a botched OS in FAT32 (which is why I stick with FAT32). Going NTFS takes just a little more CPU than FAT32 but you have the advantage of better security; however, if your OS ever crashes you're gonna have a harder time recovering the files. You say you want performance, so I'd reccomend FAT32. But if you've already installed XP NTFS then you're gonna have to buy something like Partition Magic to convert the drive to FAT32 or start clean, wipe and reinstall.
Cheers.

To convert NTFS back to FAT32, you will need a Partion Manager like Partition Commander or Partition Magic, these are capable of converting NTFS to FAT32 without any loss of data.

Although, personally, I would stick with NTFS as it is a more reliable and faster-accessed file system. Also, for a 40GB hard drive you would have to partion your drive into two sections because FAT32 cannot handle 40GB.