iphone says restore - itunes says unlock iphone

With the passcode lock enabled, entering the passcode should not be required when connecting your iPhone to iTunes on the computer you normally sync your iPhone with, but you should know your iPhone's passcode regardless. This is required when connecting the iPhone to iTunes on a different computer - not the computer the iPhone is normally synced with.

I've been using an iPhone with the passcode lock feature enabled since the original iPhone was released nearly 3 years ago, which I used for over a year before buying a 3G nearly 2 years ago. Entering my passcode has never been required when connecting my iPhone to iTunes on my Mac I sync my iPhone with. You should be prompted to enter the passcode when the iPhone is connected to another computer or a different computer than the iPhone is synced with as additional security, which applies to an iPhone that is lost or stolen with the passcode lock enabled and someone that found or stole the iPhone tries to connect the iPhone to their computer - different from the computer the iPhone is synced with.

Try placing your iPhone into recovery mode. If successful, this will require restoring your iPhone with iTunes which you need to do anyway based on the error message provided.

http://support.apple.com/kb/ht1808