THANK YOU so much!! Been trying for four hours to restore. For you PC users with Windows 7, if you have a Mac, try this. No promises, but it worked for me...
1. Download (to your Mac) the Recboot mentioned previously (
http://www.sebby.net/659-released-recboot-1-0-2/)
2. Connect the iphone to your Mac
3. Run the Recboot (not the 'exit only' one, just RecBoot itself) - click yes when it asks for confirmation
4. Open itunes and run a restore. If it's successful (which it was for me after d/l'ing Recboot), move on to step 5.
5. On your PC, uninstall itunes and all Apple items from Control Panel/Uninstall Programs/ then search publishers for Apple
6. Reinstall itunes on PC
7. Shut down and restart PC
8. Connect your iphone to your PC with itunes open
...worked for me after many hours!!