I am 5' 7" and have a medium 2005 Avalanche. I have about 8 inches of seatpost sticking out. One of my buddies had a medium Avalanche as well, he's about 5' 10", his seatpost was out about ten inches - near maximum.
If I were you I'd be looking at a large for yourself, and a small for your wife.
Basically, as far as fit is concerned, you just need to worry about top tube length (this is how long the frame is - affects whether or not you can get stretched out enough on the bike. You have a little leeway here, by playing with longer or shorter headstems, depending on if you want a racey feel or a cruisy feel)
Standover is just that - how high the top tube is off the gound, just ahead of the front of the seat. In other words, if you dismount over the frame, how much "gonad room" there is for you. It can be very important if you are riding in rugged terrain.
Obviously, the frame needs also to have a long enough seat tube so you can get the seat high enough to get proper leg extension, with most bikes coming with a 350mm seatpost, which has about 10 inches of usable up / down adjustment.