What is the difference between "update" and "restore"?

According to Apple, "update simply updates the software that controls iPod and may also update the firmware for the hard drive. Update does not affect the songs and files stored on iPod's hard disk." Whereas, "restore erases the hard disk and restores iPod to its original factory condition. Because restoring iPod erases all of the songs and files on its hard disk, make sure to back up your songs and files first."

For additional information regarding updating and restoring your iPod, please refer to "Updating iPod Software" and "Restoring iPod to Factory Settings", respectively.

For information on updating and restoring your iPod shuffle, please refer to "Resetting iPod shuffle" and "Restoring iPod shuffle to Factory Settings", respectively.

For the iPod touch, please refer to "Turning on/off and resetting iPod touch and iPhone" and "Updating and restoring iPhone and iPod touch." All of these documents are from the Apple Support Site.