"Our app is a beautiful photo frame with a few nice things you can put over your photos."
There's her problem. I'm assuming the app is a full screen digital picture frame app, and then you can put their special widgets on top of it. The only thing wrong is she said "a few nice things" instead of "widgets".
It's her own fault the app got rejected.
EDIT: Not sure why I'm being down voted for this, but basically I'm saying that Apple was quite clear about what the issue was, and it shouldn't be difficult for her to understand this. When they update the terms of the contract, I'm sure it'll make more sense. Updating contracts isn't as simple as adding in one sentence - things take time.