There are purchased items on the iPhone “X’s iPhone” that have not been transferred to your iTunes library. You should transfer these items to your iTunes library before updating. So how about a clue as to what's not transferred and how to?

I'm no Apple expert, just ran into this problem myself.

Solution:

1) Before you can transfer the purchases you need to Authorise the computer (do this from the Store menu)

2) Once the computer is authorised, then you can transfer the purchases (File->Devices->Transfer...)

User Experience comments for Apple:

3) Hiding the menu bar is plain stupid and ruins the User Experience. I've been fighting iTunes for weeks and only now have I found it. How useful. This really is not clever or smart. It's amazingly dumb. Frustratingly this is like the rubbish Microsoft is now doing with Vista/7 and moreso with Windows 8.

Repeat after me: Hiding menus does not help the user of the software.

4) The warning when you try to update is useful in that it stops you losing data but useless in that it doesn't tell you (in sensible, non-expert language) how to do this. It really should have either:

a) A help button taking you to an explanation of the problem

b) A "transfter these files for me button" that takes you through all the necessary steps, including authorising the computer if need be.

I'm gobsmacked that I'm advising Apple on User Experience issues, but there you go.