Herman,
Don't mean to be contentious, but I believe it is you that has it completely wrong.
Holding the option key on launch allows iTunes to work with multiple libraries (have you ever actually tried this??).
In this case there are two libraries in question: the original (now fried), and the back-up (hopefully identical to the original).
If iTunes is pointed to the back-up, it should not be able to tell the difference between the back-up and the original library.
The only thing that MAY prevent this from working, is that the back-up was made by dragging and dropping, which could conceivably result in iTunes becoming confused.
Your point that iTunes is versatile enough to not require all music files to be in the "iTunes Music" folder is certainly correct. However, disasters like this make a very strong case for keeping all your music in one place, rather than scattered hither and yon on your hard drive--or worse yet--on multiple hard drives.
Perhaps Brian (Cycles2), the original poster, could update us on his progress?
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