Ok, I did a quick teardown. Sorry for the blurrycam but its on my phone!
Thing sticking out of the slot is a microsd to sd adapter - should allow faster speeds than with a microsd card.
From what I can tell, the device reads any normal fat partition, encrypts/encodes the data and then passes it to the 360 which may allow use of more than just SD cards.
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The chip is a Philips ARM7 mcu (LPC2888FET180) a little unusual to have on a memory card? Theres also contacts for a i/o LED in the top right corner.
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The chip is a RawScience "FreeBox". Datel own RS, so I'd assume this handles encryption or whatever - and theres not much chance of getting a datasheet for it.
The 8 contacts lower down are either gpio or were originally for use with a full size SD... or both?