This is the dialog that iTunes gave me when I launched it while logged into my portable user folder on an external volume.
And then when I pressed OK, it promptly quit. It didn't let me create an iTunes folder somewhere else, it didn't let me choose an existing iTunes folder that it was too dumb to find. Do not pass go, do not listen to your music.
Shall we count the problems here?
To be fair, this is iTunes v4.7.1 (30), so I can only hope this has been fixed since I think iTunes is now up to version 6, but somehow I doubt it because it is one of those edge case user experience problems. I haven't upgraded because version 6 broke one of my iTunes Applescripts that works just fine in v4.x. But that's another bug report.