So the breath can be outside, inside, or experienced as moving between the two. But there's also that fourth possibility, when it stops altogether.
We experience something close to this when we are reading a really good book, or trying hard to hear a faint sound. The closer we concentrate, the more calm the inner winds become, and thus the breath. When the breath actually stops for long periods of time, it does so for one of two reasons: either our focus in general is perfect, or we have destroyed the very thoughts and winds that create the veil of the Great Mistake.
Of course the first can help us get to the second, but it's the second one we want: that's what Master Patanjali defined as yoga itself, back in the beginning. All the physical practices of yoga are aimed at stilling the side channels, which causes us to see ultimate reality and eventually turns our body into light: an angel who appears wherever someone needs.
These results in physical yoga, and especially the breath exercises, come only after steady work with a qualified teacher. Someone who's been trained personally by a Master in an authentic tradition. Someone who's obviously keeping up a good practice, and gotten results. Don't try to force things yourself, or do them incorrectly; you could very well hurt your body or mind. Success comes very surely and naturally only by planting the right seeds—through the yoga of self-control and commitments.