I agree with all the advice above. The key to managing files with iTunes is understanding that iTunes keeps track of where your media is located via the iTunes Music Library. If you don’t want the detailed explanation just click on the following links:
Consolidating media in iTunes for Mac
Consolidating media in iTunes for Windows
NOTE: You can choose manually MOVE your existing media (i.e. .mp3s) to the new directory versus having iTunes copy the media, by unchecking the “Copy files to iTunes Music Folder when adding to library” function prior to consolidating the library, then after iTunes is done consolidating, you can manually move your media to this new directory/folder. This may be desirable especially if you want to maintain your original file formats or if you don’t need iTunes to copy existing media.
In addition, the latest version, 7.6, allows multiple iTunes Music Library files to be created; this option is made available via a plug-in (shareware) called MultiTunes 1.3 that lets you switch between multiple iTunes libraries from within iTunes itself; this allows users to store media in multiple locations simultaneously (i.e. multiple hard drives)
And now if you want to read my explanation of ‘what’s happening’ based on your description and question (can’t help the teacher in me speaking here), read on:
The iTML is an XML file (database file) that tells the iTunes application where all your linked content is (whether in the documents folder of your C drive on PC or the Macintosh HD:users:username:Music folder on the Mac). To the detriment of most users (advanced or even the uninitiated), the default settings in iTunes only serve to ‘centralize’ media in the iTunes folder on the C drive or the default drive (including copying/duplicating your media), in order to maintain data in a single location. iTunes does this by automatically copying any media dragged into its main window, and in addition, placing that copy in AAC (Advanced Audio Codec) format-Apple’s default format for audio-in the iTunes Music folder on your C drive.
The result is that any when any audio media, be it .mp3, audio CD, etc. is ‘dragged and dropped’ or otherwise loaded into iTunes, iTunes will faithfully execute this default importing instructions-copy that media (ripping) into the C drive, in AAC format. The problem with this is, most ‘power’ users who manage large libraries eventually end up filling up their C drive with media (esp. in the case of movie files), and in AAC format no less.
So the issues to rectify become:
1. “telling iTunes” where you want your media to live (e.g. an external or second hard drive), and
2. changing the default importing behavior so that iTunes doesn’t automatically duplicate/replicate your media to the C drive and re-arrange it by its default directory structure (Artist/Album/Track), and
3. specifying the desired audio format (.mp3, AAC, lossless audio, WAV, etc.)
On the Mac, most, if not all settings for the application (in this case iTunes) are found in the Application menu (iTunes Menu); On Windows PC, it can be found in Edit Menu/Preferences. The two links at the top of this post allow you to configure these settings by consolidating your media to the desired directory (e.g. an external hard drive). Once this is complete, you can delete any duplicates in other folders/drives, as this will be the new directory.