Tonite i stumbled upon a method to fix the 300mb problem. Forgive me is this has been covered already as I searched alot tonite and did not come across this posted anywhere and thought I would sahre my findings.

The situation: an OTB iphone 1.1.1 which when jailbroken via resulted in the dreaded 300mb space issue. Restoring it again to 1.1.1 does not fix this and the only workaround I could find involved some command line stuff which seemed initimidating and did not prove to work.

So I thought what if I try to wipe the slate clean and viriginizing it did just that.
below are the steps taken from a website that explains how to do this but nowhere does it say this process cures the 300mb problem.

How to "Virginize" if you already upgraded and have 04.01.13_G.
You would want to do this if you upgraded to 1.1.1, and now have 0049xxx IMEI, and Modem version 04.01.13_G. Check this in Settings → General → About.

Set Settings → General → Auto Lock → Never
Install BSD SubSystem found in System Category.
Go to Sources and tap edit and add (if you haven't already).
Now install "Virginize 04.x" found in Unlocking Tools category. This will take almost 10 minutes.
When done, restore your phone to get 1.1.1 firmware reinstalled.
When phone have been restored, you can Activate and unlock as normal.

when all done, go to settings, about and verify the 300mb is gone! this was tested on a 1.1.1
I hope this info helps many.