What I'd like to do (seemingly such a simply thing), is take one 500GB out, replace w/ 1TB, and let the drives re-image. Then remove 2nd 500GB and plop in my 2nd 1TB drive...let the drives re-image, and voila', 2x1TB HD's in RAID1 w/ full 1TB of space available less what is already used today (vs. 500GB in the RAID1 as it is "now" and the other 500GB either not available or separate from the RAID1 image). Make sense?
Sorry, what you are suggesting will not work. What will happen when you add the a new 1TB drive and re-image the RAID is, the 1TB will be split into a 500GB RAID partition (to sync against the existing 500GB disk) and another 500GB JBOD partition.
If you want to move to a bigger 1TB raid, here is a procedure you can follow:
First backup your 500GB RAID data (just to be safe), then
install both 1TB drives and setup the new 1TB RAID, then
restore your data to the 1TB RAID from the backup.
question #2) the only file format in FWv1.06 is Ext2
question #3) I've always used auto.