(Found using my super Google powers at PCguide.com)
32-Bit FAT (FAT32)
As hard disks continued to increase in size through the 1990s, the limitations of the FAT16 and VFAT file systems began to become obvious. The use of large cluster sizes led to a significant amount of wasted hard disk space (slack). Eventually, hard disk manufacturers started to create drives so large that FAT16 could not be used to format a whole drive in a single partition. PC makers complained that FAT16 was unwieldy for modern machines, and users were confused with PCs that came with what seemed like two or three different "hard disks" (which were of course really just different partitions created to get around the FAT16 volume size limit.)
To correct this situation, Microsoft created FAT32. This newest FAT variant is an enhancement of the FAT/VFAT file system (even though the "V" was dropped from the name, FAT32 is based more on VFAT than FAT). It is named FAT32 because it uses 32-bit numbers to represent clusters, instead of the 16-bit numbers used by FAT16. FAT32 was created primarily to solve the two problems mentioned above. It allows single partitions of very large size to be created, where FAT16 was limited to partitions of about 2 GiB. It also saves wasted space due to slack when compared to FAT16 partitions, because it uses much smaller cluster sizes than FAT16 does.
FAT32 was first introduced in Windows 95's OEM Service Release 2, and was originally available only in later versions of Windows 95 when purchased from a hardware manufacturer. FAT32 support was later included in Windows 98, Windows ME and Windows 2000 as well. Many non-Microsoft operating systems can also now either read from or read/write FAT32 partitions. With hard disk sizes headed into the stratosphere, FAT32 has all but replaced FAT16 for those using "consumer grade" Microsoft operating systems.
