There are two problems with not using NTFS.

FAT32 volumes can only be sized up to 32 GB during XP installation. XP can work with large FAT partitions, but cannot create them.

FAT32 has a file size limit of 4 GB. This is an issue if you are making video files, converting a DVD to MPEG, or anything else that may result in a single very large file.

On the networking issue: I think when you run the wizard to set up a network on your XP machine, you will be prompted on whether you want to create a network setup disk for your machines with older operating systems.