No need for 3rd party software even if it is free, Win7/8 has FAT32 formatting ability.
1. Identify the letter of the drive you want to format to FAT32.
2. Double check this letter, making sure that there is no data you want to keep still on the drive!!!!
3. Open a command console window - Go to Start - Run...
Note: If Run... is not available (Default situation), then you will need to right-click on the Start button and select Properties, then, in the little window that comes up, go to the Start Menu tab, then click the Customize... button. Another little window will appear, so you now check the Run Command (near bottom of the listing) before clicking OK on this window, and OK again to close the Properties window.
4. At the prompt, use/type the command structure:
FORMAT volume [/FS:file-system] [/V:label] [/Q] [/A:size] [/X]
Typing, for example: FORMAT E: /FS:FAT32 /V:PS3 /X
This command would format the E: drive to FAT32, giving it a label PS3 and it will force the drive to dismount before starting the formatting process, if necessary.
Why not use option /Q?
While formatting is extremely quick in comparison when using this option (it uses the Quick format process), if you are intending to use an old drive, this option does not check for bad sectors and make them unavailable for the PS3 to use. Using /Q could result in unexpected game crashes because data may be stored on bad sectors which are not reliably read by the drive, resulting in corrupt data being sent to the game.
Why not use option /A?
Microsoft recommends using the default Allocation unit size.
Since many game files are very large, you may want to use a /A:64K to speed up file access times, however, doing so can have its drawbacks. The only problem with this is that you could get a lot of unused space on the drive when files are just over a multiple of this number. The default /A value is 32K for drives larger than 32GB. Going smaller than 32K will likely save drive space at the expense of file access speeds, read this as "game loading time increases the smaller the value".
Here is the full Help listing from the FORMAT command (get this info by typing FORMAT /? at the command prompt):
Formats a disk for use with Windows.
FORMAT volume [/FS:file-system] [/V:label] [/Q] [/A:size] [/C] [/X] [/P:passes] [/S:state]
FORMAT volume [/V:label] [/Q] [/F:size] [/P:passes]
FORMAT volume [/V:label] [/Q] [/T:tracks /N:sectors] [/P:passes]
FORMAT volume [/V:label] [/Q] [/P:passes]
FORMAT volume [/Q]
volume Specifies the drive letter (followed by a colon), mount point, or volume name.
/FS:filesystem Specifies the type of the file system (FAT, FAT32, exFAT, NTFS, or UDF).
/V:label Specifies the volume label.
/Q Performs a quick format. Note that this switch overrides /P.
/C NTFS only: Files created on the new volume will be compressed by default.
/X Forces the volume to dismount first if necessary. All opened handles to the volume
would no longer be valid.
/R:revision UDF only: Forces the format to a specific UDF version (1.02, 1.50, 2.00, 2.01, 2.50).
The default revision is 2.01.
/D UDF 2.50 only: Metadata will be duplicated.
/A:size Overrides the default allocation unit size. Default settings are strongly recommended for
general use.
NTFS supports 512, 1024, 2048, 4096, 8192, 16K, 32K, 64K.
FAT supports 512, 1024, 2048, 4096, 8192, 16K, 32K, 64K,
(128K, 256K for sector size > 512 bytes).
FAT32 supports 512, 1024, 2048, 4096, 8192, 16K, 32K, 64K,
(128K, 256K for sector size > 512 bytes).
exFAT supports 512, 1024, 2048, 4096, 8192, 16K, 32K, 64K,
128K, 256K, 512K, 1M, 2M, 4M, 8M, 16M, 32M.
Note that the FAT and FAT32 files systems impose the following restrictions on the number of
clusters on a volume:
FAT: Number of clusters <= 65526
FAT32: 65526 < Number of clusters < 4177918
Format will immediately stop processing if it decides that the above requirements cannot be
met using the specified cluster size.
NTFS compression is not supported for allocation unit sizes above 4096.
/F:size Specifies the size of the floppy disk to format (1.44)
/T:tracks Specifies the number of tracks per disk side.
/N:sectors Specifies the number of sectors per track.
/P:passes Zero every sector on the volume passes times. This switch is not valid with /Q
/S:state Where "state" is either "enable" or "disable" Short names are enabled by default