I need help updating iPhone 4 OS 5

Ugh! I've been trying to update my iPhone 4 for the last 5 hours! The first time I tried to do it I lost all my contacts but I still have them somewhere on my computer.  Now I have a grey screen that says iPhone on it and when I unlock it, it goes to the set up screen asking if
1. "set up as new iPhone" - which I DONT want to do
2. "restore from iCloud back up" - which then prompts me to either choose set up as new iPhone or Restore from iTunes
3. "restore from iTunes" -which I tried but it goes to the screen with the USB cord with an arrow pointing to the iTunes logo.When it's plugged in it makes no difference.  It says on my computer that it's working but no difference on the phone.
How do I fix this without losing everything???? Help!

after selecting restore from backup, you should see a screen asking you wich backup (on the computer)

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