Instead of explaining you the whole law, I think it would be best if I just provide you with information you need in your particular circumstances.

First of all, your wife needs to apply for naturalisation. This is the process by which she will become a British Citizen. Only upon becoming a British Citizen she will be eligible to get a British passport.
Now, you got to totally forget about any information about any reference to eu or eea citizens in the forms and guidance. Your wife got ILR in 2006, so all the info regarding eu or eea is totally irrelevant in her case. If you try to poke you nose into it, you will end up getting totally confused, and then you will have to hire an immigration advisor, costing you about £500.

So, now what your wife needs to do?
Fill up this form carefully
http://www.ukba.homeoffice.gov.uk/sitecontent/applicationforms/nationality/form_an.pdf

Also attach this payment slip, she needs to pay £735
http://www.ukba.homeoffice.gov.uk/sitecontent/documents/britishcitizenship/feesfrom060410.pdf

Its not the most difficult application to make, but there are things that if you get them wrong, your application will be refused.

If you get stuck somewhere, just send me an email: asimsparks@hotmail.co.uk

(Please note I am not a legal advisor. I just mention and share the information. None of my words should be treated as legal advice)

This is extremely kind of you, thanks.  I will pull up the form and read carefull as no doubt, there are several supporting documents i'll need to send.

Nope. There are not several documents that need to be sent. All you need is applicant's current passport, previous expired passport and life in the UK test pass certificate. You can also send your application through nationality checking service, which is run by various local councils. They charge a fee for their service on top of the application fees. You can take the filled up application form, and all the original documents to them. They will photocopy all your documents and return you all the original documents there and then. Then they will forward your application to home office.

It seems she has two ways she can apply under. 1) Residence or 2) Marriage.  It seems marriage is the easiest as it just requires my passport and our marriage certificate.

Also, just to confuse things, my wife is dual nationality (I'm aware of the restrictions those countries have).  Her Dutch passport has the ILR stamp but when we fill out the form we need to put Moscow as her place of birth (she's also Russian) but obviously under nationality we should put Dutch.  Wont that confuse them?

None of this can be done using her Russian passport/nationality.  It must be using her Dutch nationality.

Thanks

No, applying on the basis of marriage is not the easier option. If she applies in her own right, she just has to produce all her passports, plus life in the UK test certificate. Marriage cert and your passport are totally irrelevant.

Nothing will confuse them, there is no law in the world which says that if a person is born in moscow they cant be dutch. She already applied for and received ILR with the same details. I was born in India and my nationality is British. I think you are thinking about things that are irrelevant. She simply needs to fill that form, send all her passports, life in UK cert and fees and job done.

I wonder if anyone can help as I am getting lost in all the Border Agency info (especially about EU and EEA!! - not sure the diffrence)

I am British and my wife is Dutch.  She has been here since 2001, we married in 2005 and she received the ILR stamp in 2006 on her passport.  She passed the Life in UK test last month.

This should be a simple process but I'm a bit lost.  

What does she need to supply for a passport and under which heading. (i.e married to spouse, length of time in UK)

Thanks