ITunes consumed 90% of hard drive! Can't upgrade/sync my phone!

Question

My immediate problem: I bought a 64GB 4S to replace my 16GB 3G.  I've managed to do a proper backup of 3G on hard drive and have told iTunes to restore from backup onto 4S, but it is insisting on backing up the 4S first!  There is no space left to do that so it starts, fails, and bombs out without doing a restore!  Same applies trying to upgrade 4S to latest iOS 5 version.  (Annoyingly it doesn't even check for adequate space on hard drive, it just fills it up 100% and doesn't erase the incomplete sync/backup data after bombing out!!!)
I changed phone companies when I got 4S and changeover took 3 weeks, so I installed music and apps on 4S while waiting, and I have much unique data etc on the 4S that I want to keep, otherwise I'd reset it first.  But there's no room to sync it.  I've bought DiskAid so I can get at the files on the 4S and that was working OK, but it also needs to sync to get some of the native data/files, and it puts its files where iTunes does, and now there's not enough room to use it either!  So I'm stuck: I can't use 4S until I can restore.  Can't do that without getting more hard drive space or erasing 4S.  Can't erase 4S without getting data off first, but not enough memory.  Can't make enough hard drive space because it's all taken up by iTunes data and I don't know if it can be moved/deleted and how safe it is to try.
Suggestions?
Option 1: find another way to get data off iPhone 4S
Option 2: find way to safely move iTunes data to drive F (2 TB) without making the backups unusable
Option 3: work out what iTunes data on drive C can be deleted
Option 4: ?
How do I control iTunes?  Can I move the data, etc to another hard drive?
Background: iTunes keeps filling up my 120GB hard drive!  I've been moving off all my large folders and files for months and now there's almost nothing left that I can take off and put somewhere else!  We have 5 iPhones and an iPod using iTunes on PC, with many GB of tunes and 100-250 apps on each phone so the space used is huge!!!
Thanks!!!

Answer 1

First thing I'd suggest is cloning your hard drive to a larger drive. You'll continue to have problems running any hard drive that close to capacity. Don't want to do that?
Move your iTunes library to an external drive:
http://www.makeuseof.com/tag/easiest-move-itunes-library-external-drive/
Change the iPhone backup path;
http://aaltonen.us/2011/01/03/change-the-location-of-your-iphone-backup/