filing USA tax first time from UK

My wife and I are USA permanent residents living in the UK since late August 2010. I filed a 4868 form to get fax filing extension because we could not exclude our UK income until the end of August which is later than an automated extension given by IRS to those who live abroad.

On my return I had my salary from the USA (W-2), some income from renting out our place in the USA, child credits, work credit, and excluded income from my UK job.

I e-filed our taxes today (before October 17th deadline) using the H&R block free software. However they were rejected by IRS. The only explanation given - you can not e-file and need to mail your return.

Did I do anything wrong? Should I worry about this or this is normal for efiling from abroad? I would definitely prefer efiling if this is possible....
 

As green card holders you would have to file the 2555 forms claiming the physical presence test. Did you have qualifying periods?

Yes, I did that. My period is from 23/08/2010 to 22/08/2011

I have never tried the software you refer to. Does it accept employers without EINs? Does it accept foreign postal codes?  Does it produce a code or diagnostic saying why you can't e-file?

Hopefully you filed your FBARs before 30 June 2011 and are reporting such things as UK child benefit and UK employer pension contributions.

Yes, the software accepts foreign addresses, UK zip codes, etc. My USA employer had EINs and it accepted my UK employer without an issue. As a foreign citizens we can not get UK child tax credit (public funds) and had never more than $10,000 on our accounts and therefore should not have done FBARs.
I report my full UK salary that partially pays for my UK pension...

If this is an issue with the software itself, could anyone please recommend me a software that will allow efile form the UK? On the IRS website it says that this is possible and the H&R block was listed as one of the options... I would hate to print and send my taxes by mail if I can efile.

So you are reporting the employer pension in full and not electing to use the UK/US tax treaty.

Don't forget to include the value of the pension plan in deciding if you ever exceeded the $10,000 threshold for the FBAR. If you did, then the maximum value of the pension plan needs to be included on the FBAR.