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And, if you don't have a jail broken iDevice yet (cause, maybe, you have an iPhone that you want to leave on iOS 5.0 because you hope that a jail break will come soon, but, oh my heavens (!) if it doesn't come soon you are going to kill somebody because that badge is going to freakin' drive you nuts ... not that you're OCD or anything, but honestly, did Apple have to make it so that denying an over-the-air update would ensure you'd always see the consequences of that decision with that bright red badge sitting right there on your Settings app, which is sitting right there on your main page (!)...maybe it's their way of making people snap and accept their upadates!)...
Wait, what was I saying...?
All you can do is ignore it. There's no way to remove that bright red badge until/unless you update to iOS 5.0.1 ... or jail break the device to do as muffinb suggests. Which you can't do ... yet.
Sorry. Does it help to know you're not alone with that bright red badge sticking out right there on your Settings icon...?
Marilyn
Wanders off, mumbling: red, red, red, re....