Received a replacement iphone 5. Do i set up as new or restore from backup?

Just received a replacement iphone 5. Original was backed up and during set up of the replacement it states that i cannot complete the backup as the replacement does noy have ios 7.0.3. Do I backup to an older backup? Set up as new?

Welcome to Apple Support Communities
In that case, you have to set up the device as a new one. The iPhone you have received has got an older iOS version than the one you had before, so now what you can do is to open Settings > General > Software Update, and install iOS 7.0.3.
Then, you can go to Settings > General > Reset > Erase All Content and Settings to restore the phone to default settings, so you will be able to restore the backup and use your old settings

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