I have my iTunes music and video on two external drives. It's something that iTunes supports by default.
In addition to what ghporter said, you can also drag the music from the finder into the iTunes window. By default, iTunes is set to copy the files you drag into the library into the iTunes Music folder. You can tell if it's going to copy the files if there is a + sign on the mouse cursor when you put it over the Library. If you don't want to copy it to your iTunes Music Folder, you can hold down the option key while dragging and the + sign will disappear. In this case, only links to the files will be added to iTunes, allowing you to keep the files anywhere.
(It's also possible to turn off the automatic adding of files in the iTunes preferences. In this case, holding down the option key will do the opposite -- the files will be copied.)