Why FAT16 ? I doubt it would work with FAT16, USB sticks are usually FAT32.
In any case even if you convert to FAT32 I don't know that it will work with that drive.
I have an LG unit with USB input for playing MP3's photos and Video clips, it failed to read a 40GB HDD, but plays USB sticks.
Why don't you try Philips support and ask them before you go any further.
PS. I just Googled the question and my suspicion was correct it does not play a 500GB drive only USB sticks. Read a response from H.Ilani at: http://www.amazon.com/Philips-HTS3544-Theater-System-Co...