I dont know about defragging the hard drive, but I do know that the games aren't stored on the hard drive. The drive is used somewhat for caching of game data, but primarily it seems to be used for possible game add-ons (like updated rosters), memory card saves, and other small things nothing large (except maybe music). So I'm assuming fragmentation is not as big of an issue for X-Box as it would be for a computer which has its executable content on the hard drive.