iPhone Encryption Error

My girlfriend updated her phone to IOS 4.1 this morning and cannot restore from her backup. In iTunes her backups are set to be unencrypted, but all of her backups going back to march 2010 are encrypted. She has been yelling at me nonstop over this issue. Any help would be appreciated, I want her to have her phone back more than anything. :P

edit: pictures to show the predicament.
http://imgur.com/y4TEl.png
http://imgur.com/kCp3F.png

Message was edited by: spfite