NTFS is a better option. It's mor secure and the file system is better than fat 32. What witchy said is exactly the way you want to do it as far as the formatting goes. (You cant format a drive that is in use cause you need to use a program to format and if you are wiping that disk then the program wont exist and thus you cant do it.... )

Make sure you set the partitions properly first time though cause it's a pain to rush thru it only to discover you've done it wrong and have to re-instal windows all over again!

Alan