Since your XP is already using FAT32 (this is odd, I thought XP filesystem was NTFS or something similar), IMHO you shoudln't need yet another VFAT partition only for file transfers between Linux and Windows, you could use a directory on the existing XP partition instead.
But, if you do decide to go for a separate VFAT partition then, yes, you should see that sort of information on your screen. Beware, though: Linux installer will make room for the partition, but I am not sure it will format it, you might need to do it either from Windows or using mkfs.vfat ('man mkfs').
(WARNING: if you're not too familiar with Linux yet, be extremely careful with mkfs or you might screw your existing installations. Don't say you haven't been warned, and don't blame me if you screw up
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FYI my setup here is: a NTFS partition with Win2k (which Linux can access in read-only mode), another one with VFAT used by both as "auxiliar storage" and an ext3 partition with Linux.