The M$ way! M$ tells you: buy more RAM!
Well, having run XP in 256, 512 and 1Gb systems, I can safely say 1Gb is where XP is most comfortable in. I was tempted to get another 1Gb but decided against it. 1GB physical RAM and a 768MB pagefile are enough for most games an apps for a year orso.. (Hello longhorn.. ;-))
Not sure about the question.
Using FAT with XP is a bit weird, formatting the drive during setup as NTFS (quick format is enough) should give the best results. The default settings are ok. No need to play with them.
Just make sure you setup the pagefile correctly. Forget the 2.5 or 3 times RAM rule, it's bogus and at best used for Win3.x of Win98 with 16MB ram. What's the best pagefile size ? Depends on the usage..
Also turn of the Bubbly look of XP, but not just by sellecting the classic look. If you right click my computer then sellect properties and go to the advanced tab, then sellect "performance"and turn off as many unneeded candy effects as needed (fade in and fade out). Gives a nice boost.
There are many tweaks to boost XP performance. Some work, some don't. Some need more RAM to be of any effect. Like TweakXP or TuneUp Utilities 2004 but user beware.... (IIRC they also offer Filesystem boost tweaks)