applying for passport

Hello
My wife has been in the UK since October 2003 and obtained ILR along with me in August 2004
i am going to apply for British nationality this September, i was wondering if my wife is eligible to apply for British nationality in September 2005 or she needs to wait another year and can only apply in October 2006 or after ?

That sounds correct. You will get your naturalisation first and then, of course, your wife will be married to a British Citizen, so she can apply after being in the UK for three years.

would this be 3 years from her date of entry ?
i.e. 3 years from October 2003 which would make it October 2006

the issue is she did not enter the UK as the spouse of a british national, but as the spouse of a work permit holder.

she obtained ILR after 10 months of her stay in the UK(since iobtained ILR) and now we are confused about her status.

when can she apply for British nationality

As long as for all of the three years she was legally in the UK, it does not matter that her status changed part-way through the three year period.

Assuming she will not have had excessive periods outside of the UK during the three year period, it looks like she will merely need to consider the absolute rule ... she must have been in the UK exactly three years before IND receive the naturalisation application.

But don't overlook the fact that the two references need to certify that they have known her for at least three years. At the very least that might delay her application by a few days.

thanks for clearing up my misunderstandings
i guess the referees need to be british citizens

The references? Q6.12 on the form AN(NEW) says :-

I declare that
● I am a British citizen aged 25 or over;
● I am not a relative, solicitor or agent of the applicant;
● I have known the applicant in Section 1 of this form personally for [ ] years;
● He/she is of good character and (if not married to a British citizen) has sufficient knowledge of English/ Welsh/Scottish Gaelic;
● I am willing to give full details of my knowledge of the applicant;
● I support his/her application for naturalisation as a British citizen.

The number of years needs to be a minimum of 3. Also note that the two references must not be related to each other.