Hello Myron,
It can be very handy to store your iPhoto library (and your iTunes library for that matter) on an external drive. Make sure the drive is formated for Mac (MacOSExtended) rather than for Windows (MS-DOS, etc.). Storing Mac data on a windows formated drive reduces performance and can damage data over time.
Apple documents moving the library to other locations on their website:
http://docs.info.apple.com/article.html?path=iPhoto/7.0/en/6331.html
You can check to make sure your drive is formated correctly and re-format if needed following another knowledge base article:
http://docs.info.apple.com/article.html?artnum=306143
Please be aware that if you do have to reformat the drive it will ERASE any information currently on the drive.
Cheers!