XP Home does support NTFS, it doesn't support file encryption:
The Encrypting Files System (EFS) allows you to encrypt files so that unauthorized users cannot view their contents. This is helpful in a high security or a laptop environment. EFS depends on the NTFS file system. Both Windows XP Home and Professional support the NTFS file system, but EFS is disabled on XP Home. EFS is best used on laptop computers.
So, the lack of EFS support is no biggie really.
Converting to NTFS from a FAT Partion on an existing install of XP is a very bad idea:
Beware of Converting Partitions to NTFS Under Windows NT: Converting a partition from FAT to NTFS under Windows NT results in the NTFS partition being assigned the smallest possible cluster size, 512 bytes. This may cause a degradation in performance.
http://www.pcguide.com/ref/hdd/file/ntfs/implPart-c.html
To format as NTFS, you can simply boot from CD, and tell Windows to format as an NTFS partition via the simple menu system that pops up. At the moment I still use Fat32 after converting to XP from an old 98 install without problems. When I eventually reformat though, I shall be going the way of NTFS, mainly due to it being harder to corrupt via power failuires than Fat32.