Start a new iTunes database (erase old one completely) ?

Question

As discussed in the following old post of mine, my wife's iTunes database has been corrupt and I can't find any workable solution. Songs just continue to disappear without a trace, so, with the purchase of a new iPhone4 I'd like to start from scratch;
http://discussions.apple.com/thread.jspa?threadID=1683512&tstart=0
Note that we have two user accounts on our computer, the music is on the shared drive, and both of our iTunes "accounts" point there. So, we pull from the same source of music, but each have our own playlists and such. This was the only way I could find to not replicate all our music twice on two different user accounts.
We're not geting a new MacBook or iPod, but she is getting a new iPhone. So, I would like to completely blow away her old iTunes directory and start fresh.
However, the new iPhone4 will be restored from the iPhone 3G backup which will by default include all of the iTunes data as well. We'll do this so call history, texts and applications will all come over as-is.
We're prepared to go through the pain of creating new playlists again or at least importing them from the old database (that will be exported before we blow it away).
Just in case I may have over complicated this question;
*How do I erase a user's iTunes database so I can create a fresh one?*
THANKS!

Answer 1

Thanks, Chris. This is really helpful. A couple more questions based on your answers;
Chris CA wrote:
6 - File -> Library -> Import playlist and select the iTunes library.xml file in the iTunes folder on the desktop. This will bring back all the playlists and some other info. This needs to be done after step 5 because if the songs are not in iTunes, they will not show up in the playlists.
If the songs are missing, will they not show up at all (which is preferred) or will they show up with an exclamation point stating "the song could not be used because the original file can not be found..." Which is what happens now.
If it just only lists the songs that it can find, that would be great. We can focus on replacing files and not worry about all these playlists with huge holes of available music.
Chris CA wrote:
7 - File -> Add to library and select the *Mobile applications* in the iTunes folder on the desktop.
When she plugs in her new iPhone, she should select Restore from backup then select the latest backup in ~\Library\Application support\Mobilesync\Backup
Okay, so what will happen here exactly... if she restores from backup won't it bring back the old iTunes library which we have just blown away? How do I restore everything, but then have her iTunes sync with the new library instead of the old one. (since the user account is the same i thought it might confuse the phone.
I will try the repair and restore suggestion as well when booted from the DVD. It was so long ago I can't remember if I did that, but I don't think so. I think I just restored from the backup and she has had files mysteriously disappearing ever since. Odd thing is, it doesn't happen to any of my songs...not a single one. Only happens to songs that are only in one of her playlists. But, rather than solve that puzzle I'd rather just start fresh. I'm picking my battles and have already lost that one.
Thanks!