What does set up as new iphone and restore from backup mean?

I have an ipod touch and I have many pictures, apps, and music on it. And now I have an iphone. I plugged my iphone in, and "Set up as new iphone or restore from the back up of" popped up. What happens if I set up as new iphone? What happens if I restore from back up? What do you suggest? I don't want to delete anything from my Ipod or my Iphone. I don't want apps, music, texts, or photos to be deleted. What should I do?

When you do a backup of your iDevice, it takes all of the your texts, contacts, saved levels in games Internet profiles (I think!) and of course your song and video etc selections and saves them as a file to the destination set in itunes. (Usually somewhere in my music under itunes on a PC. When you restore from a backup on a new device like your iphone, you basically make a copy of your old ipod to your new iPhone. Of course this only applies if you have made a backup of your ipod! Setting up a new device means it will start fresh with none of your prior nformation or settings. You will need to select apps, music, video etc again. You will want to do a 'Restore from backup' As for erasing things, backups shouldn't erase. Just make sure you don't ever go wiping your ipod!