From the article linked below:
You will be prompted with one or more restore options that may prompt iTunes to automatically download of the latest iPod Software. The 4 possible restore options are:-
Restore Option 1: Restore - Restores with same iPod Software version already on iPod.
Restore Option 2: Use Same Version - Restores with same iPod Software version already on iPod even though a newer version is available.
Restore Option 3: Use Newest Version - Restores with the latest iPod Software available.
Restore Option 4: Restore and Update - Restores with the latest iPod Software available
Restoring iPod to Factory Settings with iTunes 7