You are correct and your suggestion for the formatting should work great.quoting geekforgotten now: "I cant seem to format the drive to FAT32 as it only gives me the options of exFAT and NTFS"
i have externals on both my XBOX360 and PS3 for game storage both drives formatted in FAT32 and i have no problems with downloaded (legal) games for the xbox and ps3 the install files are not bigger then 4 GB and the game saves ain't bigger then that either so i don't see the problem...besides him not having the drive in FAT32
As I stated GeeksForgotten has made no mention of what type of files we are dealing with so I can't say anything regarding that yet.