From what I've read online, it needs to be formatted either FAT32 or HFS+ in order for the Time Capsule to serve it out to clients. Given the two choices, I would format it HFS+. FAT32 has filesize limitations (no files larger than 4GB allowed). Unless you'll be directly accessing it with a Windows PC, HFS+ will work as both Macs and Windows PCs will be able to access the hard drive once connected to the Time Capsule.