I've recently got a 360 (a bit late to the party...) and I've attached a USB external harddrive sized at 500GB. However after i connect and configure it through the xbox menu i only get 16GB out of it. 
 
I've read that the harddrive has to be formatted to FAT32, which i've tried but i still only get 16GB out of it. 
 
So for anyone that has an external HDD attached, if you have any advice or suggestions, I would greatly appreciate it, thanks!

It's the max xbox 360 supports atm for external storage.

16GB is the maximum storage the Xbox 360 supports for an external USB drive. It's all part of MS's plan to get people to purchase official Xbox hard drives which cost about 5 times as much as they should.

I think 16GB is the max storage size supported per USB device.
 
EDIT: damn, you guys type quick

Yep, 16GB is the max it will see; can't have you circumventing microsoft's 1st party branding and higher priced drives by buying one that's half the cost and twice the size, now can we?

Ah, I kindly thank you all for your answers. Now I go unkindly shout and shake my fists at something microsoft branded.