iTunes 7 allows you to make and manage multiple iTunes libraries, just like iPhoto 5 and 6! You can now easily keep an iTunes library installed on your computer’s hard drive and a separate iTunes library installed on an external drive.
To create a new iTunes 7 library, click on the groovy new electric blue iTunes icon, and then quickly mash down on the Option key. You will be prompted to choose an iTunes library, or to create a new one. If you create a new library and you want to switch back to the old iTunes library, simply hold down the Option key again when launching iTunes.
Other programs have allowed you to do this, but this is a very easy solution to a common problem.