I just spend about 4 hours troubleshooting this. someone gave me a link in a 
forum thread and I followed the steps outlined here and it worked. I cannot hep 
anyone who is stuck as I'm dead on my feet and I still need to let apple know 
about this, again.

Apparently this has been an issue since day 1 of the folders thing last year. 
Steps follow to fix the issue.

1: Connect to your phone to iTunes (make sure this is before you tried to 
restore it or lost all your icons) 
2: Right click your phone in the left hand menu and select "Back up" (record 
the time so you know which backup to use later) 
3: wait for that to finish 
4: If you need to do a full restore (firmware and software) click on your phone 
in the left hand menu then click the settings tab then click the restore 
button. If you don't need to do a firmware restore (you do need to do this if 
apple has officially unlocked your phone or you have paid your phone carrier to 
do it) then just right click your phone in the left hand menu and click 
"restore from backup" it's important to note the difference between the two 
methods the first is a full firmware restore the second just puts your files 
back on the phone and does not touch the firmware. 
5: Let it finish. Don't let it sync cancel it if it tries. 
6: Once it's finished or it tries to start syncing and you have cancelled it 
click on your phone in the left hand menu and select "Restore from backup" (yes 
you have to do it twice it's not a typo). Make sure you select the backup you 
made in step 2. 
7: let it finish and this time let is sync. It should take a while and once 
finished all your folders and apps will be there. 
<--- Mac Access At Mac Access Dot Net --->

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