I found this good article that explains the right way to move your iTunes collection to a new location. This location can be a new folder on your hard drive, an external drive (USB, Firewire or eSATA).
Go to www.ilounge.com for instructions. Read them carefully, as they show you how to let iTunes do the move for you. Don't be tempted to try this without following the instructions carefully.
Special Note if you move your iTunes to an external drive: make sure this drive is connected before you try to access iTunes. If iTunes cannot see the external drive when it starts, it will not find the library, and make up a new one.