An even better way to format the drive is to just right click on "My Computer" select "Manage", then select the "Disk Management" item from under "Storage"... From there you can partition and format any hard drive connected to your system. Even if it doesn't show up on the desktop yet.
If you're moving between XP systems, or Win2k and XP systems, then pick NTFS (I'd use the quick format). Otherwise, you should select either Fat32 or just Fat. Fat should also be used if this is going across platforms (such as Mac to Windows) since it will allow you to mount the drive under both operating systems.