Personally, I use PS3 Media server. It was easy to setup, and transcodes things, so I don't have to worry about converting video formats. I think it's awesome.
But... if you want to do things the hard way, you would want to make sure the external drive is formatted to FAT32, and tweak the folder structure.
Here's a forum post explaining how:http://community.us.playstation.com/thread/1662488?start=0&tstart=0
But... I'd still strongly suggest you go to this link instead, for PS3 Media server:http://www.ps3mediaserver.org