Help with Dual identity please

Got a 3GS
Activated and number transfered at Best Buy - everything FABU
Number was transfered from original iPhone which is now an iPod touch.

Plan was to reactivate old iPhone to the wife.
Wife transfers to AT&T from T-Mobile to a free LG phone.
Phone active and functioning with her transfered number and account under her name.

Told to take phone home and swap sims to iPhone and register iPhone under her number. Done, iPhone now working and registering her phone number and name.

Here is the problem... The old iPhone will only see ME as the App Store account and all of MY songs, photos, and Apps are still present.

iPhone was updated to 3.0 before the transfer in title.

How do I get the phone to lose MY identity and only see her as the owner.

Note, in syncing music, photos, and contacts, all seem to now relate to her iTunes databases. Some Apps were deleted, others are still present upon sync to iTunes. Some free, some paid. Also none are backing up to her Applications Tab in iTunes. Again this seems to be an iDentity issue.

Do I just restore to factory and start over? ARRGH.

Appreciate the help.

~InnerSongs