Factory reset imac

after a disaster last night buying and trying to install lion i now need to do a factory reset on my imac.
I have a 15 month old imac bought from john lewis who provide a 2 year warrany independent of apple.
Last night i downloaded lion only to be met with a S.M.A.R.T error, unrepairable harddrive and lion would not install.
I rang the suppliers tech desk today and they told me i would have to return the product to store (for a new hard drive i presume)
I would rather not take it back with all my photos and id's so would like to know how to reset it to factory conditions.
BTW the machine seems to work ok apart from not being able to install lion and showing this message
thanks!

if the drive is still operating, I would just "Secure erase" any sensitive info. as long as you have a backup.
If the drive is toast, it's toast.

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