I use my external hard drive in my xbox to listen to music and watch movies. The other day, I came across the option of setting it up to use as an external storage space for games. My question is, if I do this, will I lose all my music I already have on there or will it just use the 40gb and leave the rest of my media alone? Thanks!

I believe the hard drive is shared so no you won't lose your music if you add more data on.

I wasn't aware that the 360 supported external memory beyond memory sticks.

You can only use 16 Gigs on the external drive, and it formats it to the proprietary Xbox HDD format.