Well, HDs are HDs, no matter how they are formatted. The fact that you can replace it with a larger one suggests the thing uses standard PC HDs, though probably with a custom file system.
Considering the XB's HD is used mostly for custom (i.e. user created) files like savegames, having to reformat it means losing your files. I imagine one cannot back 'em up because there'd be no need for save-to-disk exploits then. Also, reformatting sounds like a bit overkill to repair things like a corrupted FS or bad blocks. Well, another reason to install Linux, I guess...