It looks to me like you are changing the permission on the device
file, not the filessystem on it. Using a terminal, here is the
difference on an external USB drive that I have hooked up at the
moment:

jbuchana@zaphod$ mount | grep sdb
/dev/sdb1 on /media/disk type ext3 (rw,nosuid,nodev,uhelper=hal)
jbuchana@zaphod$ ls -ld /media/disk
drwxr-xr-x 15 root root 4096 2008-11-06 23:50 /media/disk
jbuchana@zaphod$ ls -l /dev/sdb
brw-rw---- 1 root disk 8, 16 2008-12-25 16:22 /dev/sdb
jbuchana@zaphod$

I found the mount point of the disk (which I already know, and you
likely do on your system too) with the 'mount' and 'grep' commands,
then I used 'ls' with the 'l' (long listing) and 'd' (directory
information, as opposed to what's in the directory) I then looked at
the device file for good measure, using the 'ls' command again, long
listing.

We don't have r/w permission to the device itself, but we do have
permission for the mounted filesystem. If we didn't have permission to
access the filesystem, I'd do 'sudo chmod -R 777 /media/disk', setting
the permission to rwxrwxrwx, assuming I wanted everyone to be able to
read/write to it. In my example above, only root has permission to
write to this filesystem as I have it now.

> Well it didn't seem to work! Is ext3 that much of an advantage?

That depends. If you are *only* going to use the drive on the Linux
system, yes, I'd say that ext3 is worth it. If you are going to share
with a Windows machine (which I do with my wife's laptop for the above
disk), then you'll need a filesystem that Windows can read.