Microsoft has announced that in the next update for the 360 they will allow people to use their own External HDD to save games, store music, videos, Arcade Games, DLC, Games on Demand and everything else that you can get off XBLA. However, there are some conditions that they need you t agree to. Firstly, you can only have up to 16GB of space that the 360 uses. Second, it needs to be set up in the right way, which means you need a few partitions of various sizes for it to save System things to.
All the information I have about it is on here, Engadget. A lovely place.
I've never seen the point of people moaning about the 360 HDD being only 120GB. I would still be quite happy with a 20GB, because all I have on there is Serious Sam, Fallout DLC, Gears 2 DLC and save games. The only reason I have games installed on there is because they load a bit faster. I don't really care about it though if I only had a 20GB.
Anyway, right now I'm downloading the Splinter Cell: Conviction demo. It was released today, and I expect to get it in the 'near future'. Hopefully before it actually comes out.