You may want to restore to factory settings when you're selling your touch, sending it in for repair and don't want any personal data on it to be seen by strangers, or its data is so messed up that it needs to be deleted and replaced.
You will now have a stock i Phone on your current firmware.
Accidentally deleted contacts, photos and other files from your i Phone and i Pad?
Frustrated that your i Phone is stolen or damaged and important files have gone for good?
As noted above, every time you sync the touch, you create a backup.
You may want to restore from one of those backups when you buy a new touch and want to load your old data and settings, or want to revert to an older state if your current one is having problems.