I have started with 1.3 and never used anything else. Never needed. Putting in two clean, fresh drives and setting them up for RAID1, formatting ext3 has worked w/o any hiccup. JoeSchmuck posted elsewhere that for him the device is faster with ext2, but - as he described - it is less robust. There are other tricks you can try if you are in the enterprising mood, I am not. :-)
According to what I read these devices tend to be sensitive (including the DNS-321) when someone tries to use previously formatted drives. So removing all partitions (with your choice of partitioning tools) before putting a used drive into the DNS-321 sounds like a good idea. There are some that claims that you should 'zero out the drive' using tools like Western Digital Drive Manager. Again, so far I did not need to do that, but it might help.
Real life failure: I have read here some people - including JoeSchmuck - trying to emulate a failure by pulling a drive (while turned off), starting up, shutting down again and then putting back the drive. They had not reported issues with that so far, but I don't know if the DNS actually rebuilds the RAID in such case or simply recognizes that the drive was put back. It should generally work.
I have not read anyone reporting actual real life failure of a HDD around here so far, so I have no info on recovery successes / failures.
The safe approach is that you should always use the same manufacturer / same model to replace a failed drive, but theoretically it is not a requirement. Just note that because two drives from two (or the same) manufacturer are labeled both as e.g. 1TB that does not mean they have the exact same number of sectors. Even the same manufacturer might use different number of sectors in different models. Since RAID1 in the DNS-321 works by synchronizing the physical sectors of the two drives, if your replacement drive has even a few LESS sectors than the original... it won't work and you will have a hard time to figure why.
(Actually the DNS-321 does not format the whole 100% of the drive for data, it keeps some room for administrative purposes, so I can imagine that it COULD use a drive with a FEW less sectors and just make the administrative part a bit smaller. But I never tried this and I am not planning to try. Is is up to the firmware if it could / would handle a situation like that.)
If you get a new drive and it fails within a short period of time (few months), your best guess is to RMA it to the manufacturer and get an exact replacement. And if your drives start failing after a few years... you best bet is to get two new drives and just copy the data.