NTFS is more stable than FAT/FAT32, has self healing options, is more secure, you can use security, encryption, compress folders/filers (I don?t mean the ZIP feature of XP), is faster for large hard drives, etc. I use NTFS since I introduced it on large network 7 years ago, but only on servers. Since then I've used it with Win2k and XP. Because of my work I experiment a lot with new software and only on NTFS partitions. What I can say from personal experience is that today almost every software is compatible with NTFS, even the programs that would also run on a win95/98/ME machine. Programs that are famous to have a problems with NTFS are older versions of programs that have direct access to disk, software like partition managers, defragmentation software, diagnostics and recovery software etc.
I always advice every user at home to go for NTFS and then mainly for one reason; stability; NTFS is very stable. In the old days a simple scandisk or chkdsk in the earlier days always showed lost clusters, some of which could recovered, but in most case you would lose some data. This risk has been highly reduced after the introduction NTFS. Win XP even has an extended version of NTFS, version 5.1. As long as the average use doesn't change the permissions of files and folders, there shouldn?t be too many problems, also because you will need more than just one click to change something.
The reason that Microsoft warns the average users not to use NTFS at home comes from the time that NTFS was mostly being used on business computers during the period of Windows NT. Even in those days mostly servers used NTFS and workstations were most of the times configured with FAT, because it was easier for technicians to diagnose/recover systems with a simple dos boot floppy.
Since 2 or 3 years a lot of home users started to use NTFS, first with Win2k, later on with XP. Many software manufacturers had to make sure that their software would work without a problem on NTFS partitions and trust me, they seldom had to change anything.
Let?s be honest; with Win2k and XP we still have a system on which it is easy to delete a few system files, boot files, a partition, do a format, mess up the registry with regedit etc., all which are a higher risk than a user changing permissions.
We now have rock solid operating systems (if well configured) that really need NTFS as foundation. FAT/FAT32 will be a thing from the past in a few years, especially with the sizes of hard drives growing faster than ever. It?s not without a reason that NTFS is included in both Home(!) and Pro versions of Windows XP. The only reason to use FAT/FAT32 would be in certain multi-boot configurations for different operation systems. About the SP1; it is true that there are occasions that some things don?t work the same after installing SP1, but that is the case with almost every service pack. The best way to install a service pack would be the re-installation of the operating system with an XP setup CDROM that already contains SP1. Reinstallation would mean a lot of work, but it would mean the most stable environment.