I'm pretty sure that the space is used up on your computer's hardrive.
Anyway my solution to this nuisance of apps/itunes transfer was to allow itunes to download the apps from my phone...
...First of all I had tried to uncheck a few boxes in itunes a) automatically sync when device is connected (in the summary section) b) prevent devices from syncing (edit>preferences>devices) and c) Automatically sync new apps (apps section of device)
HOWEVER, when I would click sync in any section, apps tried to transfer to itunes from my iphone.
So after all my apps went on my computer (approx. 9 GB), I checked the boxes back, disconnected my device and deleted all the apps from itunes and my computer simultaneously (by clicking del/move to recycle bin).
Now when I connect my iphone it does it's backup/sync thing automatically ...but no apps try to transfer 🙂
Note: apps from your library cannot be set to sync with your device
I can now also click sync in any section and no apps transfer.
(This problem started when I downloaded an app from itunes rather than my device and I later transfered the app to my device. My apps section in itunes is completely empty now and no apps appear in windows explorer either)
the only thing I am unsure of now is; what's going to happen if I purchase an app from itunes on my pc again ...I'm guessing I'll have to repeat the process (might want to avoid that)