Currently Being ModeratedSep 26, 2011 12:26 PM (in response to hsellitto)
Connect in recovery mode and follow the instructions here. iPhone and iPod touch: Unable to restore and iPhone and iPod touch: Wrong passcode results in red disabled screen
If you cannot remember the passcode, you will need to restore your device using the computer with which you last synced it. This allows you to reset your passcode and resync the data from the device (or restore from a backup). If you restore on a different computer that was never synced with the device, you will be able to unlock the device for use and remove the passcode, but your data will not be present. Refer to Updating and restoring iPhone, iPad and iPod touch software.
If the issue continues after updating and restoring your device, refer to this document.