so i just bought my 16gb, iphone today
the person i bought it from had already unlocked it, meaning when i place my t-mobile sim in, i can make calls and receive calls. so far so good
now according to him its got the version 1.1.4 on it. and my serial numbers 4th and 5th digit are 07 (i heard that's important to know, i don't know why?) since i'm new to the whole thing, i noticed there are several applications for unlocking, and also many terms: unlocking, activating, jailbreaking and so forth.

question 1. could anyone define those terms? (jail, unlock...)

question 2. the youtube button on it does not work, i don't use t-mobile internet (edge or tzone) i just use the wi-fi, which by the way works fine cause i can access web pages. but the youtube says cannot connect, and when i try to access youtube through yahoo, it says to either activate javascript or download newest version of flash adobe, but still no luck.

question 3. is there any way for me to clean the iphone totally and redo everything over again, because since i bought it ready from the guy i just feel like i'm not learning anything, so basically is there any way to put it into the original way it comes and for me to go through the entire process of unlocking , activating jailbreaking, like everybody else. and so on. i know it sounds stupid, but i would like to try it myself. any thoughts. and if so, which applications would you recommend to do it?

please excuse my ignorance!
thank you