Why is my touch screen not responding?
My daughter's iPhone 3G appears to be working normally - it charges and connects to iTunes fine. You can restore and install new software, you can add media. But the touch screen is not responding. It can't be unlocked at all.
Is it toast?
It sounds like the digitizer is loose. Remove the 2 screws from the device and reseat the assembly. You'll see if the cables are loose or not. Even if they aren't have a second shot at connecting them. If you still have problems then it's either you got a bad panel or the motherboard of the phone is shot. Oldturkey03 posted the guide in the comments.
Had a locked screen this morning on my 3GS. After a cup of coffee and a quick web search on an Apple forum I found the simplest fix to try first.
Hold down the power button and the home button below the touch screen until the screen goes dark and comes back with the Apple logo. Then leave it alone until the password login screen appears and is active. Then log in.
It actually took me two full reboots before the iPhone seemed to be running without any problems.
Seems to me a software reboot is by far preferable to doing barnyard mechanics inside the phone.