Sluggo, try looking in the iTunes preferences under Advanced/General. Look in the box under iTunes Music folder location... that is where iTunes thinks the music resides. What do you find there? It could be that the update somehow changed the location of your music folder. (I installed the same update with no problems.)
As far as I know iTunes can only access one library at a time, so I have no idea how Paddy can be accessing music simultaneously from two libraries... it's more likely that duplicate tunes reside in both libraries. Generally one has to go into the preferences to change the location of the iTunes library; in certain circumstances the iTunes library can revert to the default location in the user's music folder. So it is not unusual to think that you are adding music to one library when you are actually adding audio files to a different library.
I keep my iTunes library on an external drive because when I began ripping music my Mac's internal drive could not hold it all... And I have a copy on another external drive.
Sluggo, if your music resides on an iPod there are ways to transfer it to a Mac:
MusicRescue and
iPodDisk are two options.
And you might find more info on the Apple forums regarding whether your experience is unique or not...