Lyla was a fairly evil character in the anime when you first see her.
And no, she didn't reform at the end, Edward just beat the crap out of her (well done, now show Winry who's boss!!

)
After her defeat, she seems to not have been punished very severely since she's out and about serving as Dante's apprentice/maid. Hmm, maybe Dante was looking for a next human host and found Lyla through the Fuhrer and had her released?? Not a long shot.
As for the fate of Lyla's true soul now that Dante is the body's new owner is unclear at this time. Is her soul merely suppressed? Is it destroyed? Or did they actually switch bodies? This may give another explanation as to why Dante destroyed her old husk, since having a witness around (even if she's in the body of a grandma) would be troublesome.