Hiya.
I've had it on an external drive in the past… and now store it on a network storage device (NAS) where I store all my media. It's pretty straightforward to setup… but one thing you really need to watch out for is ….
The drive where the library is stored (your ext drive) needs to be mounted before you open itunes. If you start itunes and it can't see the drive, it resets your library location to default (users/music in mac, My Music folder in windows). Once you plug the drive in, it'll play the music ok, but the next time you import a CD or buy something of itunes etc, it'll store it in the default location and not your ext drive… so if you're not careful, you can end up with your collection all over the place and have to do big sort outs… I've been there, not fun.
If you need any help – feel free to drop me and email..
P.S – did you post off my ipod touch yet 🙂