iPhone 3GS

My sister has been using her iPhone 3GS for a while. I always told her to hook it up to iTunes to back it up and sync with her pc. She never did and now when she is trying to upgrade to iOS 4 she runs into a problem. After registering her iPhone she gets a "set up as new" or "restore from backup" option. All I want to know is will "set up as new" delete all her data? I'm pretty sure it will but can't find a definitive answer. I know restore would be the proper thing to do but since she never connects it to her pc her latest back up is from 6 months ago. So please just let me know what "set up as new" will do. Thanks!