You may have some problems but there is nothing wrong when you open "My computer" and XP says it is a DVD-RAM drive. It is just the way it works, as XP gives native support to DVD-RAM and can format the discs under FAT32.
But to format and write DVD-RAMs under UDF you need a DVD-RAM driver (like the Panasonic or similar) or packet writting software (like Nero's InCD or a similar product from other maker).
Did you install InCD? It can be a problem, as it conflicts with other burning software - that will depend also on your XP version (original, SP1, SP2?) and Nero version. There were some problems that may have been solved by now, but it is not a straight question/answer.
When you try to play the movies, are you using any proprietary software - Power DVD, WinDVD, NeroPlayer? - or WMP?
As you have two drives, how did you define their tasks? Did you "tell" XP that this new drive is the one you want to play movies?