Im trying to restore my imac as im selling it. Ive followed advice from the internet where when you start it hold down on 'alt' until 2 disks appear but this never happens. I went into Disk Utlity to earse but the earse button is shaded out so it wont let

Try starting up from your install disk holding the C key. select your language, then in the next screen click Utilities in the menu bar>disk utilities, select your volume in the left side bar and then click erase.

What OSX was installed when you purchased your Mac? Even though it was installed you should have received the install disk(s) as the Utilities are on those.

If you do not have the install disk you can try contacting Apple and see if they can supply one,(explain you never received at purchase) you will need the build info of your machine, which can be found by clicking the Apple logo in the menu bar>About This Mac>More Info, and it should be in the first window under hardware overview. Model Identifier.

Customer Support:

800-767-2275

Erase instructions

http://support.apple.com/kb/HT3910

You need this, it's $20. Include it with the computer when you sell.

http://store.apple.com/us/product/MC573/mac-os-x-106-snow-leopard

When you have this, follow the directions sanjampet has provided in the first post.

By the way the option and r keys boot up works with OS 10.7 and 10.8. Not with 10.6.