The easiest thing is for her to should return to your home country and appear for stamping as one normally would for an H-4 visa. It sounds like only a change of Status was denied; this is not unusual for someone who did not maintain their status. It is likely a timing issue where your definition of in status does not match that in other records. Don't fight the process; just take the easy way out and get the stamping.

What is the status of the children? If they did not receive COS to H-4, they have the same issue.