Also, regarding those Advanced Preferences in iTunes:
I changed the Advanced Preferences in iTunes to point to the backup location, but I think this is only to tell iTunes where to rip new music.
What this does is point iTunes to the location of the "iTunes Music" folder. This folder is where the actual music files reside. And, as you point out, the "iTunes Music" folder is just one component of the iTunes Library.
Making this change does NOT change the location of the "iTunes" folder (which normally CONTAINS the "iTunes Music" folder). What it does, in effect, is put an alias of your "iTunes Music" folder into your "iTunes" folder. This alias then directs iTunes to the ACTUAL location of the music files, wherever that may be.
So while this allows iTunes to locate the music itself, it DOES NOT tell iTunes where the actual "iTunes" FOLDER resides. And since iTunes is expecting this folder to be on your now kaput disc (which it can no longer access), until you redirect it to the "iTunes" folder on your backup disc, it is at a loss as to how to proceed, so it will appear "broken."
Redirecting iTunes to the proper folder on the backup disc should restore everything to its pre-crash state.
Hope this makes sense!
-