You are right that the thumbdrive is FAT32, and will not accept reformat to NTFS.
I have read that most inexpensive flash drives are formatted FAT32 rather than NTFS to lengthen the usable life. NTFS is a journaling file system and reads and writes to files much more often than other file systems like FAT and FAT32. Bottom line -- don't look upon a flash drive as reliable backup media, only as a handy way to transfer data between more reliable storage media.
One advantage of formatting flash drives with NTFS is that Windows XP enables the write cache, so writing small files to the USB drive becomes much faster.
If you use Macs, be aware that MacOS X can read from a NTFS-formatted flash drive, but can only write to FAT-formatted drives, unless you use a 3rd-party program such as MacFuse.
I was able to reformat several flash drives to NTFS
this way. The key step is to change the default "Optimize for quick removal" to the "Optimize for performance" option under the Properties>>Policies tab.
Or use the "command line":
convert x: /fs:ntfs (where "x" is the drive letter assigned to the flash drive).
