I work in IL, my wife works in MI. How do we find our allowances on Fed W-4 and State W-4s?
As per IRS advice, we claim all allowances on higher income W-4 and none on the other one. But since our states are different, how do we mention our allowances there?

The purpose of W4 is to guide your employer how much tax they should withhold from your pay check.
You can divide the allowances. You can always submit a new W4 if you want to change the allowances.
Read: Your U.S. Tax Return: Filing W4 Employee's Withholding Allowance Certificate (http://taxipay.blogspot.com/2008/02/filing-w4-employees-withholding.html)

The purpose of W4 is to guide your employer how much tax they should withhold from your pay check.
You can divide the allowances. You can always submit a new W4 if you want to change the allowances.
Read: Your U.S. Tax Return: Filing W4 Employee’s Withholding Allowance Certificate (http://taxipay.blogspot.com/2008/02/filing-w4-employees-withholding.html)

Thank You MukatA. Here are my specific questions

1) My total allowances come out to be 2 [Entering '1' for myself and '1' for 'married'. If I enter '2'. Could my wife enter '1' allowance for herself or should it be '0'].

2) Should we both fill the double income sheet [counting factors for highest and lowest income] to report additional withholding per month?

Thanks for your help

Because your wife's income starting tax is equal to your marginal tax rate, you should claim '1' exemption on your W-4 and ZERO on her W-4 to ensure enough money is withheld to cover your tax liability on your joint income.