I made a 2007 contribution to Roth IRA's for my spouse and myself in early January. Since then, I have recieved an inheritance (annuity beneficiary taking a lump sum distribution) that has moved my 2007 income over the allowable contribution limits. What steps are involved in rescinding our contributions? Should this be done sooner or later?
Any advice would be appreciated

Contact the company where you set up the Roth IRAs. They will have forms and procedures for you to follow. Sooner is generally better but you have until the due date of your 2007 tax return. Refer to IRS publication 590 here: http://www.irs.gov/pub/irs-pdf/p590.pdf See page 62. One option listed there is to apply the excess contribution to a later year (which again would require contacting the IRA company).

…or, recharacterize the contribution to a Traditional IRA.

A recharacterization or a return-of-excess contribution must include net attributable income (NIA). If you are lucky, the custodian will calculate the NIA for you. If not, you will need to calculate it yourself, or pay someone to.

Thanks for the information, especially the link to IRS regs. After talking with USAA where I have my Roth, I understand that my options are:
1-Having my contribution returned and paying 10% penalty on the earnings to this point (I'm under 59) as well as being taxed on thr earnings.
2-Carrying over my contribution to the 2008 tax year. This engenders a 6% penalty on the contribution for the 2007 tax year.
Assuming a 6% return on my $5000 contribution, option 1 would cost me ~$30, whereas option 2 would lead to a $300 penalty which might be partially offset by the earnings.
Am I missing something obvious here or is this a no-brainer? Unfortunately, recharacterizing to a traditional IRA wont work as I am maximally invested in a 403b.

You could make a non-deductible contribution to the Traditional IRA. However, if the net result is better- it may be better to leave it in the Roth IRA where the earnings can be tax-free.