iTunes Library on External Drive

"When it comes time to move your iTunes library, it can often be a bit of a challenge to figure out exactly what pieces you need to move and how to go about doing this.

Moving Your Content to a New Hard Drive: The Wrong Way
A very common mistake made by many users is to simply try and move their entire iTunes Media folder to a new location and update the iTunes Media folder path in iTunes’ preferences. In some cases this may work, but in reality you will risk iTunes losing track of some or all of your media files in the process.

Consolidate: The Right Way
Start by going into your iTunes Advanced preferences, and changing the iTunes Media folder path to whatever new location you want your iTunes media files to be stored in. This will usually be an external hard drive, but it can be any valid path, including a secondary hard drive or even a network share.

Once you have updated the iTunes Media folder location, simply select File, Library, Organize Library… (in iTunes 8, this option was “Consolidate Library” and in iTunes 7 and prior, it was located on the “Advanced” menu)

Since iTunes copies the media content rather than moving it, you will probably also want to delete your iTunes media files from their original locations."

READ: Transferring your iTunes Library
by Jesse David Hollington, iLounge