Hey,
The iPhone User Guide describes the Erase All Settings command.
"Erase all content and settings: Connect iPhone to your computer or a power adapter. Choose General > Reset and tap “Erase All Content and Settings.”
This feature resets all settings to their defaults and removes all your information and media on your iPhone by overwriting the data stored on iPhone."
http://manuals.info.apple.com/enUS/iPhone_UserGuide.pdf
Do you see the same issue on another computer?
If you haven't already try restarting the computer and iPhone. You can restart the iPhone by holding the Sleep/Wake button until the red slider appears> then slide to turn off> and turn the iPhone back on by pressing the Sleep/Wake again, as described on page 46 of the iPhone User Guide.
You can also contact U.S. iPhone technical support at: 1-800-MY-IPHONE (1-800-694-7466)
-Jason