The data being deleted is in reference to the data already stored on the phone (e.g. the sister's contacts). An iPhone can only be synced to one PC at a time, and if you want to setup syncing with this new PC, you will need to delete all of the data on the iPhone.
If your wife wants her sister's contacts, then she shouldn't sync and wipe the data before she has a copy of all that info. One way to to get the info on to the iPhone is to sync it with outlook (via iTunes) on the sister's PC. Then export the contact's from Outlook, copy the file to the wife's PC, import into Outlook. Then proceed ahead with the sync that will wipe all the data, and set it up to sync with Outlook. This way your wife will have all the original contacts.
If your wife does not care about her sister's contacts, then you can go ahead with the initial sync that wipes all the data.
When the phone is synced with Windows 7, it will use the following folder for backups: \Users\(username)\AppData\Roaming\Apple Computer\MobileSync\Backup\. Therefore, you should back up that folder if you want to keep a second copy on your computer.
If the most important data that will be used on the phone is Contact information, I would recommend that instead of using Outlook, that your wife use Google Sync. This will allow her to store all of her contacts in Gmail, such that if anything happens to the phone, the contact info can easily be accessed again online, all without ever having to sync or backup (or double backup) the phone. Google Sync can also sync your Calendar. If you setup a Google account as IMAP, you could even have the Notes synced to the cloud as well.
Keep in mind that when the data gets wiped, everything on the phone will be deleted. This includes, but is not limited to, the following:
- Music
- Videos
- Podcasts
- Address Book and Address Book favorites.
- App Store Applications and their data.
- Application settings, preferences, and data.
- Autofill for webpages.
- CalDAV and subscribed calendar accounts.
- Calendar accounts.
- Calendar events.
- Call history.
- Camera Roll (Photos, screenshots, images saved, and videos taken.)
- In-app purchases.
- Keychain (this includes email account passwords, Wi-Fi passwords, and passwords you enter into websites and some other applications.)
- List of External Sync Sources (Mobile Me, Exchange ActiveSync).
- Location service preferences for apps and websites you have allowed to use your location.
- Mail accounts.
- Managed Configurations/Profiles.
- Microsoft Exchange account configurations.
- Network settings (saved wifi spots, VPN settings, network preferences).
- Nike + iPod saved workouts and settings.
- Notes.
- Offline web application cache/database.
- Paired Bluetooth devices.
- Safari bookmarks, cookies, history, offline data, and currently open pages.
- Saved suggestion corrections.
- SMS and MMS (pictures and video) messages.
- Trusted hosts that have certificates that cannot be verified.
- Voice memos.
- Voicemail token.
- Wallpapers.
- Web clips.
- YouTube bookmarks and history.
(This list was slightly modified from Apple's page)
Best Answer
I'd do neither, personally. I don't trust or like any unlocking service or jailbreaking, so I would try to check if it's carrier unlocked by this (optionally not contacting T-Mobile to ask them yet to unlock).
If it's locked, I would take the phone to a T-Mobile shop and tell them truthfully the essential facts you know:
You don't have to tell them who / relationship and certainly don't speculate. If they are probing to see what else you know about the phone, don't get nervous and do be polite and deliberate. Just repeat what you told them in pretty much the exact same words and then ask if they can help you. Just keep in your mind - you're notthe previous owner and you're the owner of the device now and this is a chance for them to earn your business.
It's not their "business" if you paid for it or not and they shouldn't tell you anything about the previous owner. It is their business to help you pick out a plan and understand if it has a contract or not and propose another plan if you don't like the one they suggested initially. From some very astute comments, you should probably protect yourself with a written bill of sale if you intend to say you "own" the device. Paying a dollar and writing up a transfer keeps you from lying if you go to the store. If it doesn't work out, you can always sell it back later to the previous owner.
If you can get service in your name and avoid a contract, I'd do it. Then you can look at getting it unlocked after a month or two if you're not happy with your service in getting the phone working and with the service as a user of T-Mobile. At that point, they'll have a much harder time saying you're to be penalized as a paid up customer asking for an unlock.
Make sure that whomever signs into this iPhone doesn't keep "Find My iPhone" turned on. If the device ever gets locked and the user doesn't know the password or can't get the verification code to the account. You will be stuck with an expensive coaster that Apple won't be able to help you with. They will need the proof of purchase and that doesn't exist since only T-Mobile has that and will not give that up until the balance is due.