Maybe I can answer this for you- your photos are saved wherever you desire, be it your C drive or an EHD. Your work in LR is done on a virtual copy and when you are finished with your edits in LR and PS and make a jpg. for the web, printing, etc. that is stored with your original photos in the original folder.
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My Gear: Canon 50D, Canon EF 50mm 1.4, Canon EF 28-135mm 3.5-5.6 IS, Tamron 28-300mm IF
My Software: PSE 7, Noiseware Professional, Lightroom 1.4
 
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