Hi I have a old Iphone 2G ( which has the 3G software installed) which was given to me by my daughter when she up graded her phone.
I am useing it with a new 02 Pay you go SIM card ( which I have Synced with my itunes account) and the phone works o.k
I would like to do Factory reset (erase all content and settings) to remove all the old data ect. However the instructions on the Manufactors box said that the user had " to subscribe to minimum new 18 month airtime agreement to the activate iphone features (when it was new).
Therfore would doing this reset put the phone back to this state ? Would I no longer be able to use my pay you go sim & would I loose the the use of ipod features ect and connection to broadband ect without then subscribing to a new 18 month contract?.

You can do a 'restore' from iTunes and when prompted opt to set it up as new iPhone. You won't have to sign any contract. The instructions you are referring to are very out of date, and refer to the procedure when the iPhone was first released in the uk back in 2007. It should work fine with your O2 sim.