Q: When I click restore, I have a pop up that asks me what folder on my desktop or on my computer I want to choose. What do I do?

Very odd...  This is an iPod touch that you have?  That Open dialog coming up as you describe sounds like what happens if you are holding down the Option key (on the Mac's keyboard) while clicking on the Restore button.  This "Option Restore" is there in case you don't want to use the latest available version of software (for the iPod) to do the Restore.  The Open dialog comes up to ask you to find and choose the installation package for an earlier version of software, that you want to use instead. 

But if you just click the Restore button normally (no Option key), it should just use the latest available version of software (without asking).  So I don't now why that Open dialog box comes up in your case.

NOTE:  If your computer is a Windows PC (not a Mac), it is the Shift key (not the Option key).

You can try this crazy idea, in case your keyboard is sending an Option (or Shift for PC) key press when it should not.  When you get to that point, just BEFORE clicking the Restore button, disconnect your keyboard from USB.  If your mouse is connected to the keyboard, disconnect it from the keyboard and plug it into the computer directly.  Then click the Restore button.

where do you find the restore button at?

Select iPod in sidebar of iTunes window, under DEVICES.  Over to the right, go to the Summary tab.  It should be there, on that screen.

I Had this very thing happen....after hours searching to no avail I started the whole forced recovery process over using a different power cord to connect my iPod to my laptop.  It worked the very first try!  Good luck