Improved instructions
Another update: Since it's actually the footage, and not the project files themselves, that take up significant space, it might be a lot easier just to follow the instructions here to just move the footage:
http://support.apple.com/kb/HT1026
jamtoast's instructions are actually on the right track, I think he just made a couple typos while entering them. A little Unix knowledge comes in handy for this sort of thing

The Movies folder is actually stored in each user's home directory, which is referenced with a ~. I would recommend these instructions instead:
- Move the files in the Movies folder to your external drive (I'm going to assume that you're moving it to a folder called "Movies"), using Finder (they will be copied by default, since you're dragging to a different drive, just delete the files on your main drive afterwards).
- Make an alias to the external folder and drag it to your home folder on your main drive (just let it be called "Movies alias" for now). You can do this by option-command-dragging the folder icon, or look up Aliases in Help.
- Click on your original movies folder (on your main drive) and select File > Get Info. Click on the folder icon at the top and copy it (Command-C). Click on the alias you made, do a Get Info on it, click the ordinary folder icon and paste the movies icon (Command-V). This is just aesthetic, but it's nice to have the Movies folder look different from an ordinary folder, I think.
- Open Terminal (just use Spotlight and type in Terminal). You should already be in your home folder
- Type sudo rm -r Movies and enter your password when prompted. THIS WILL DELETE ALL CONTENTS OF YOUR OLD MOVIES FOLDER, EVEN IF IT HAS MOVIES IN IT, SO MAKE SURE THE FILES WERE MOVED SUCCESSFULLY TO YOUR EXTERNAL DRIVE.
- Now go back to Finder and rename "Movies alias" to "Movies," then drag it to the left-hand sidebar so it will be listed with your folder shortcuts as it probably was before. iMovie and any other programs should know to look at your external drive now, or wherever your alias points to. (These instructions could work for a second internal drive also.)
One thing I was never able to figure out was how to get the folder icons to look just like the originals, but I think I read somewhere online that the best bet, if you're not satisfied with the image of a folder with a little reel in it, is to go to one of the sites where you can download free alternate icons for those folders and just download one you like.
Update: As I was just revisiting this process myself, I noticed one drawback to moving the iMovie folder to a different drive -- the "Media Browser" option in the Share menu no longer works correctly, i.e. other apps like iDVD won't be able to see the files you've exported. I can't seem to track down where they are on my hard drive either, so for now I'll be using the "Export Movie" and "Export Using QuckTime" options. Based on a Google search it seems that iLife 09 may change this, but I'm still using 08 so I can't test it. If you have iLife 09 and it still doesn't work, you could try double-clicking this file and playing with the settings (this file doesn't exist in iLife 08):
[Your Main Drive]/Library/Preferences/com.apple.iLifeMediaBrowser.plist