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I did a factory reset a while back when I was on 2.1 since my phone was so laggy I couldn't even place a phone call, and I'm sure glad I did as it's now a speed demon and super smooth. Yes, you lose your apps, but you can easily use appbrain to sync them. I actually did it partially, but didn't want to install all the apps at once as I thought that might be the problem, so i did it more piecemeal and it seems to be doing the job.

what about the contacts? what are the steps to import from gmail account?

As long as your contacts on in your gmail account and you sync your phone with it, there should be no loss of anything. Syncing with google is great, isn't it?! ;)

I also made a backup of my screens and shortcuts with launcherpro and it saves to the SD card, which is retained. I also took screenshots for good measure. In the end, if your phone is having major issues, a factory reset is a necessary measure and should make your phone work like new.

Good luck!
 
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