Eric,
Can't help you as to
i why
this happened, but you can recover from it.
As you surmised, you can use the ITL file you backed up to replace the current one. The XML file is not used by iTunes, only created for use in other programs. It can be imported for some recovery, but the ITL file is the Library database that runs iTunes. See:
What are the iTunes Library files?.
Using an earlier version of the Library will return the presets that you had at the time of the backup. Any changes you made since that time will be 'lost'. This includes any songs imported, changes to ratings, playcounts, etc.
The incremental song files you ripped after the backup will still be on your PC. You'll just need to 'Add' them back into the Library.
You can 'export' your newer playlists to an XML file prior to rolling back the Library. After the rollback, just import the playlists into iTunes and they will be recovered.
It will depend on how much 'work' you did since your last backup.
In the future, I suggest that you make a copy of the 'iTunes Library.itl' file each time that iTunes closes and finishes the write process. I do this, and it has saved my Library from some iTunes errors and my own, self-inflicted lunacy (I am lees than careful, as I have several backups and like to 'experiment').
Post back if you have questions.