How do you restore someone else's old iPhone?

Presumably the former owners don’t remember the passwords ?

I think your best bet would be to first contact ATT to find out which area code and telephone number was associated with which phone. Each iPhone also has a unique serial number (listed in Settings) assigned to it.

Once you have that info, then call 1–800-MY IPHONE and request a product specialist and ask them what to do. As long as they can verify your proper ownership of the phone, there shouldn’t be a problem. But routinely they ask for the area code and phone number and the particular iPhones serial # each time I’ve called in (presumably to insure against stolen iPhones.)

I would download the latest ipsw for the 2g iPhone here.
Save that someplace convenient like the Desktop. Then plug in the iPhone and hold down ALD of CRTL (I’m on a Mac and don’t exactly remember which on Windows) when you click the restore button. Then it will ask you to locate the ipsw and point it to the one linked above.

Instructions

1. Hold down the “Sleep/Wake” button at the top of the phone. After a few seconds a message saying “Slide to power off” will appear.

2. Slide the red button to power down the phone.

3. Hold down the “Home” button. After about ten seconds a yellow triangle and a message saying “Please Connect to iTunes” will appear.

4. Plug the iPhone into the computer.

5. Open iTunes.

6. Click “OK” when iTunes shows you a message saying “iTunes has detected an iPhone in recovery mode.”

7. Click “Restore” on the window that appears, and then let the restoration process run and complete.