Format your External storage device with windows/mac.
file system should be FAT 32
I have used a 2 TB hard drive this way and it works awesome.
Now remember that Retail dashboard is not going to see it as xbox 360 storage device. it will recognize it but only give you the option to configure it and this option will only use up to 32 GB
So if you want to browse or Input data on your external storage device (the one you just formatted) you will need to use Xexmenu or FSD
if you would like to know anything else feel free to drop me a message.