I bought the Microsoft transfer cable when I bought a new 360 and my profile and saves transferred fine, but I lost my achievements in Bioshock. It wasn't a big deal to me since I don't care about achievements that much. That was the only game I was playing at the time, so I don't know if that had anything to do with it. My profile was also causing Gears of War 2 to freeze.
I don't remember reading anything about the drive being formatted. If you transferred everything to the new drive, then yeah, there wouldn't be anything left on the old one. You do have the option to choose what gets transferred. So if you just wanted to transfer one profile to a new system, the others could stay on the first system.