Old iPhone, new iTunes/Mac; App sync warning about losing all apps and data

I have an old iPhone with plenty of apps on it.
I have a new Mac/iTunes that I have setup and "successfully" synced with my phone.
However, on the Apps tab in iTunes (within my phone device section), the Sync Apps checkbox is not checked. If I check this box, I get a very disconcerting warning:
-- Are you sure you want to sync apps? All existing apps and their data on the iPhone "Some Guy's iPhone" will be replaced with apps from this iTunes library. --
My goal is to update iOS4.2, but I can't do that because it warns me there are things on my phone that aren't on iTunes. Yet Transfer Purchases isn't doing anything useful.
I have also Reset Warnings and reattached my phone to sync. Nothing new and exciting happened.
So, will I actually lose everything if I do the update? Will I ever be able to control my apps from iTunes (via Sync Apps)?
Does Apple realize how non-intuitive and difficult the whole iPhone-iTunes management thing is? This is so counter to their philosophy.

Hello.
You need to transfer your iTunes library from your PC to your Mac per the instructions included with this link along with all other important data from your PC that you will need or want to access on your Mac such as photos, documents, etc.
http://support.apple.com/kb/HT1751
Transferring your iTunes library from your PC to your Mac following the instructions included with the link provided along with authorizing your Mac with your iTunes account with iTunes should prevent any iTunes content from being erased on your iPhone with the first sync with iTunes on your Mac. Since all iTunes content on your iPhone - all music, movies, tv shows, and 3rd party apps should be available in your iTunes library on your PC, transferring your iTunes library from your PC to your Mac will prevent any iTunes content from being erased on your iPhone.
The only data that is wiped on an iPhone when syncing an iPhone with an iTunes library on a new or different computer is iTunes content when not transferring your iTunes library from the existing computer used for syncing your iPhone with to the new or different computer per the instructions provided, and photos transferred from the existing computer. Photos on the existing computer should be transferred to the new or different computer along with your iTunes library and all other important data from the existing computer.
Photos in the Camera Roll are not included with the iTunes sync process or touched except for being included with the iPhone's backup which is updated by iTunes as the first step during the iTunes sync process.
Photos in the Camera Roll can and should be imported by your computer as with any other digital camera. When there are photos and/or video in the Camera Roll, the iPhone is also detected as a digital camera when connected to your computer. Importing photos from a digital camera is not handled by iTunes and the same for photos/videos in the iPhone's Camera Roll. With a Mac, you can use iPhoto for importing photos/videos from any digital camera or from a digital camera's storage card including from the iPhone's Camera Roll, or you can use the Image Capture application for this if you don't prefer using iPhoto for photo storage and management on your Mac. iPhoto will provide you the Events and Faces feature available on the iPhone and you can use iPhoto for setting a location for photos that were captured by a digital camera which does not include a location feature for the iPhoto locations feature.
Contacts and calendar events on your iPhone are not touched when syncing with iTunes unless you are syncing contacts and calendar events with a supported application on your computer. With a Mac, you can sync contacts with the Address Book and calendar events with iCal. Before syncing contacts with an empty Address Book and calendar events with an empty iCal, enter one contact in the Address Book and one calendar event in iCal before the first sync for this data. This will provide a merge prompt with the first sync for this data, which you want to select. Syncing contacts with the Address Book and calendars/calendar events with iCal is selected under the Info tab for your iPhone sync preferences with iTunes on your Mac.
If you don't have any music or movies in your iTunes library on your PC - all you have are 3rd party apps in your iTunes library on your PC, you can transfer all apps from your iPhone to iTunes on your Mac. First you need to authorize your Mac with your iTunes account with iTunes if you haven't already done so. With your iPhone connected and without syncing, at the iTunes menu bar go to File and select Transfer Purchases From - the name of your iPhone. After confirming all 3rd party apps on your iPhone are in your iTunes library on your Mac, under the Apps tab for your iPhone sync preferences with iTunes select Sync Apps and make sure all apps currently installed on your iPhone are selected below.

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