what happens if i restore?

THe answer is YES, you will loose everything you now have on your computer and it will be restored to the last restore point you or the computer made - or - if the last restore point was the one the OEM set or you set, when you or they built the computer, you will be taken back to the DAY YOU BOUGHT IT (factory default).

So back everything up that you can NOW if you want to go to a restore point.

It means that the iPod is currently formatted with the HFS filesystem, which is only understood by Mac OS. As you have plugged the device into Windows, it is prompting you to reformat the device using the FAT filesystem (which is understood by Windows).

As such, it will indeed erase the music on the device. However, as long as your iTunes library is complete - meaning that there should be nothing on the iPod that isn't in your library - then you should be able to sync all of the music back to your iPod after the process is complete. In practice, you need to be careful if your library originally resided on a different computer, especially if you have any tracks governed by Apple's "FairPlay" digital rights management scheme.

Here's a good blog post that explains the matter in greater detail: http://www.ofzenandcomputing.com/zanswers/148

You may also wish to read this Apple support article which describes how to migrate your music to a different computer: http://support.apple.com/kb/HT1329

EDIT: in view of the other reponse I have seen, it should be pointed out the questioner is almost certainly referring to the restore feature provided by iTunes and/or the IPod Updater software, not the System Restore feature in Windows.