iTunes has a quirk that does this, it asks for transfer even though it has been done.
Look in Applications.
They will be here if they transferred, also even if that did not transfer all of your purchased apps, music, movie, etc can be re-downloaded from the iTunes store without having to buy them again.
Apple has lightened up on this, used to be if, for some reason, all was lost then buy it again, now you can download past purchases without problem.
Go ahead and let it do its thing, it is all safe.
It will not take long to update, now when a new iOS comes along you can do it without connecting to the computer, it will sync and update wirelessly.
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