Adam Albright has the solution!

Found the solution! Hooray!
Noticed a suggestion on this thread:
http://discussions.info.apple.com/message.jspa?messageID=11731496#11731496

To look in the ~/Library/iTunes/Mobile Backups folder to find the Manifest.plist folder, and delete entries for apps that might be causing the problem.
I remembered that a little while ago, I had started getting an error message while syncing and updated app (Sleepmaker or something- couldn’t remember which, precisely, but knew that it was a white noise app). So, I went to the Manifest.plist folder, and removed the entries for the couple different flavors of the Sleepmaker app that I had installed.

Then, reconnected the iPhone, and clicked “Continue Restore” once again when it reported that there had been an interrupted restore. This time, it went through fully! Took quite a while (~1 hr) to copy all my media onto the phone, but now it’s all there! Hopefully this will help others who might in the same situation…

via Apple – Support – Discussions -.

If you have Windows XP you may want to read this thread.

In my Windows XP the manifest.plis file was in this folder:
C:Documents and SettingsAdministradorapplication dataApple ComputeriTunesMobile Backups87XXX6HDXXK