A factory reset does not change the operating system version. If the OS has been updated before the update it will remain updated after the update.
All a reset does is wipe the user storage. This removes any apps you have installed, clears their data, and also clears the data of system apps (and hence returns their settings to default). It will remove any updates to system apps made since the last system update (as the updates live in the same storage as user-installed apps), which will return all system apps to the versions that came with the most recent system update. But the Android software itself is unaffected.
The name "factory reset" is a bit misleading: it returns the phone to "factory" state in that there is no user data on it after the reset, but it is the state that a phone with the current system software would be in when leaving the factory, not the state that particular phone was originally in. A system update overwrites the existing system, so the phone no longer has a copy of Android 2.2.1 that it can return to.
In short, back up anything of importance to you as that will be lost, but don't worry about the operating system version changing.