iPhone: Purchased items have not been transferred to iTunes

If you get this message, "There are purchased items on the iPhone... that have not been transferred to your iTunes library. You should transfer these items to your iTunes library before updating", do this to transfer those items. (Note some or all of those may simply be "free" apps.)

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...)

Source: Stephen Kellett on Apple Support: There are purchased items on the iPhone “... | Apple Support Communities