Just incase anybody is wondering - I just got back from the Apple store. Here is what happened in detail:
Synced iPhone first and then decided to restore as it was going slow. I ran the restoration process and went down to get food. When I came back up to my room - I saw that my PC had the blue death screen and it had crashed. This presumangly happened while the iPhone was being restored so according to the genius the iPhone was trying to restore itself however because the PC crashed it was stuck in a loop. They tried DFU and everything but were hit with the error I pasted above. One of the geniuses then took my iPhone and tried a different kind of DFU where apparently you skip the iTunes logo screen altogether. I have never seen this before. Anyways, now they connected it back to their Air and the iPhone restored successfully to 4.2.8.
Question: The iPhone is under my number but it shows Apple's iPhone. I know I can rename it to my name as before but I don't see the option to restore from backup which I took 3 hours ago. How do I go about doing this? I am thinking I should just click Restore but I see a message saying "extracting software." Does this mean it will restore from my latest backup and install 4.2.8 or will it 5.0? My backup is from 4.2.8 and I do not want to install 5.0 as I am doing my development processes on my iPad and not on my iPhone.