In iTunes 7 it is now possible to have multiple music libraries. This works in the same way that iPhoto has for quite a while. When opening iTunes, press and hold the Option key immediately after clicking the Dock icon or double-clicking the application in the Finder.

A dialog box will appear instead of the normal iTunes window, and from here you can choose an existing library or create a new one. Your existing library is in your user folder, under Music / iTunes / iTunes Library.

When you create a new iTunes library it doesn't just create this single library database file, it creates the entire folder, complete with a music folder and Album artwork folder.

This is quite useful for separating off a section of music. For example, you may want a separate library for your live music, your children's music or the music you don't want to copy to your iPod.

In an ideal world it would be possible to access all your music libraries from the sidebar in iTunes, but currently this isn't possible. Hopefully at some point it will be possible to change between your libraries without having to quit and load up iTunes again.