2.1 upgrade wiped apps, music, changed itunes login

I thought I was doing my girlfriend a favour by letting her upgrade to 2.1 on my computer. A catalogue of disaster followed.
At first iTunes complained that it needed to be upgraded to 8.0. I did this: it failed the first time, I ran the upgrade again and it seemed to work. (The computer runs Windows XP, fully patched and virus-free).
I relaunched iTunes. I started the iPhone upgrade to 2.1. This seemed to work fine (so this must be iTunes 8, right?). But when the phone rebooted after the upgrade, it complained that it couldn't connect to iTunes: iTunes needed to be upgraded to 8.0! Didn't I just do that? I checked the about box, iTunes was still v7.7! What???
Furthermore, the iPhone had had all of its apps, data and music wiped. And when we connect to iTunes on the iPhone, it uses my iTunes account, not hers! So we can't download the apps or music again.
1. How do we change the iTunes login on the phone back to her iTunes account? Maybe then we can get back the apps and music that she paid for.
2. The iPhone software upgrade indicated that it was backing up the iPhone before it performed the upgrade. Where is this data? How can we get it back? Will it contain all the data she stored in the apps that got deleted? Right now iTunes won't even connect to the iPhone because it's the wrong version, even though I thought I'd upgraded iTunes (twice).
3. Where does Apple get off summarily wiping user data and switching user details without any kind of prompt or warning? Something along the lines of "Warning: Do you really want to ruin your life completely? Press Yes or Yes" would be appropriate in this instance.

Thanks for replying!
Yes, she has her own iTunes account, that's how she purchased the apps and music.
So will this happen automatically as soon as she connects to iTunes on her own computer? She tells me she tried that and nothing happened, but I'll try again.
And what has happened to the backup of the iPhone that was made during the 2.1 upgrade? Can that be retrieved from my computer?

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2.1 upgrade wiped apps, music, changed itunes login

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