If you are connecting the drive through usb, you do not need to format it on the 360. Format it to FAT32 on the PC, put you games, etc on it through your PC, and then use freestyledash to view the games. When you configure it through the 360, it assumes yo uare trying to create a memory card-like storage system and only allows a maximum of 16 gigs.
I think most people are assuming you are using a 2.5 inch hard drive designed for a laptop that is being installed internally.
You are connecting to USB and will not be able to view your files through the NXE dash, but they are there, you need the proper software, ie. freestyle dash, or XeXMenu.
I repeat, do not format the drive on the 360 if you are connecting it through USB, only in it is installed in internally in the slim or a HD enclosure on a fat system.