I now also have an iPod mini with flash-based storage. I previously did similar mods on 3rd gen and 4th gen "classic" iPods. iPod mini is very accommodating to replacing its micro hard drive with flash-based storage. A key reason is because its "MicroDrive" already uses the compact flash (CF) card form and connector. But current prices for the physically smaller (and more popular) SD card is much lower at the same capacity, compared to CF card, so I used an SD card to CF card adapter, and converted a 64GB SD card into a CF card. This is the adapter I used
http://www.amazon.com/dp/B00EPMWT1M/
Its size (including thickness) is an exact match for the 4GB MicroDrive it replaces. I already had a 64GB SD card that I used with my Mac, but they cost less than $25 on sale these days! And the adapter is $13. Amazingly, the iPod mini's onboard software (designed for 4GB to 6GB of storage) works perfectly at 64GB. The available capacity is about 59GB; I have about 54GB loaded.

So, if you outgrow 8GB in your iPod mini, here's your "next" project... 🙂 Back to your actual questions.
First problem I have is that iTunes didn't allow me to "manually manage" my music prior to the "restore" since those options were greyed out!
Probably because (at that time), it was set up to sync to your daughter's iTunes library. The iPod can only be associated with one iTunes library at a time. When you did a Restore on it using your iTunes library, the previous association was removed.
If everything currently on the iPod exists in your iTunes library (on the computer), don't worry about "consequences." You can re-sync anything back to the iPod, if you remove something by mistake. Here's one convenient way to set things up...
In your iTunes library, create a new playlist. You can call it iPod Songs. Add ALL the songs you want on your iPod to that playlist. At this point, the iPod does not need to be connected. You are working with your iTunes library only. You can post back, if you want tips on working with playlists.
Then, connect the iPod and select it in iTunes (click its device button on horizontal bar) to show its settings screen in iTunes window (like you see above in my screenshot). Along the left side (in the sidebar), under Settings, click Music. To the right, the iPod's Music settings screen is shown.
NOTE: For anyone else reading this, any songs on the iPod that are not in your iTunes library will be lost.
Checkmark the box for Sync Music, if it's not already. Below that, choose the option to sync Selected playlists, albums, artists, and genres. Below that, under Playlists, find and select (checkmark) that iPod Songs playlist. You don't need to select anything else on that screen (you can if desired). Click Apply. iTunes syncs only the songs you put on that iPod Songs playlist to the iPod. Anything else that is currently on the iPod is removed.
Going forward, you can update that iPod Songs playlist in your iTunes library (add/remove songs). The iPod does not need to be connected. The next time you connect the iPod (or click Sync if already connected), iTunes automatically updates the iPod with the same changes. This is how I use my 8GB iPod nano, except I have more than one playlist that sync to the iPod (a few playlists for running and a "favorites" playlist).
I could then move on to the next possible stumbling block, "e-books". which are currently listed in both Albums and Songs... hopefully there is some way of recognising them on the iPod as "books".
I think you mean audiobooks. Text-based "e-books" do not work with iPods (except for iPod touch). If audiobooks appear in your iTunes music library, they need to be categorized as audiobooks in iTunes. Right-click a "song" (that is actually an audiobook) in iTunes, and Get Info. You can select multiple items at the same time and Get Info on the selection. In the Info window, go to the Options tab. Change Media Kind to Audiobook, and OK. The item now appears in your iTunes Audiobooks library (not your Music library). The iPod also see the item as an audiobook, not a song, when synced.
To set up syncing for audiobooks, the procedure is similar to songs. On the iPod's settings screen, in the sidebar, under Settings, click Audiobooks. Set up the iPod's Audiobooks settings screen, and Apply.