IPhone – the wife just got an iphone 3GS. we both have apple IDs, but her iTunes on her iPhone shows the username

The "official" way to fix, per Apple, it is to email Apple's iTunes support (iTunesStoreSupport@apple.com), inform them of the problem, and then wait for them to fix it for you on their end. The good news about this solution is that my email was answered very quickly, the support person knew what the issue was and how to fix it, and within a couple days of telling them about the problem they had fixed it and I am up and working again.

After they told me it was fixed, it did take almost exactly 24 hours to take effect, and in the email they told me "wait about 24 hours and try purchasing an app again."

At the time I was having this problem (while traveling abroad) I was in no mood to "wait it out" as other answers have suggested, but since it was handled so capably and promptly by iTunes Support, I wouldn't suggest that as a course of action. It is a known issue for them.

While there are (too) many ways to setup multiple iDevices on the same machine, the simplest way and most headache free is having a single account on all devices synced to the same machine. That way you can sync everything everywhere easily.

If you want to have separate accounts, set separate users on the machine and then you can setup different iTunes/Apple accounts on each computer user. But that will give issues with syncing contents. Apple is not very good with sharing content with other people - but they're trying to get better on it at least with family members.