Ah ok I was not selecting the #-TRANSCODED-# directory, I was just playing them back from the main directory. I'm still not having much luck though. I dumped two of my blu-rays, Blade Runner which is VC-1 and Die Hard which is AVC. Moved them over to the raid and tried playing both through the transcoded directory, Both files will start up and play but both have issues.
In both cases FF doesn't work, it just locks up. Also in both cases the scene select feature doesn't work, it just displays an empty box. No thumbnails either when it lists all your movies in the XMB. For Die Hard, if I play it via the tsmuxer selection, then I get no audio. If I play the file itself in the transcoded folder then it plays with AC3 audio, but after a few seconds everything starts stuttering pretty bad. For Blade Runner, the tsmuxer option says "data corrupt". Playing back the file itself in the transcoded folder does playback, but with no audio. I suppose I could be doing something wrong, but it doesn't look like to me that m2ts playback support is working well. In any case, the lack of FF and no scene select totally kill it for me.
I did try one more thing. I re-encoded the Die Hard m2ts movie overnight this time to an AVC file instead of my usual VC-1 file. I used similar specs to what I use for my VC-1 re-encodes. Both files were similar size, about 3.8gb with 2 channel audio, so wireless friendly, portable friendly, etc. Anyways I played that back through the PS3 and compared it to the VC-1 re-encode version. Both play just fine with two main differences. Both file FF at 120x no problem, you can see the time counter moving nice and quick. However the VC-1 version displays many more images on screen as it FF's, the AVC version is more like a slide show, but both do indeed FF at the correct speed. More interesting though is the scene select feature, it seems to work much better with AVC files. With the VC-1 version it takes about 8 seconds to populate the scene select thumbnails, with the AVC version it takes about 2 seconds, very fast! Those were the two main differences.
I guess I'll stick with my re-encodes for now, they still look real good anyways. I'm not willing to give up FF or the ability to hop around scenes fast (either with scene select or the 360's bumper buttons), the loss of those is a definite deal breaker for me. I don't really want to transcode either since that means keeping a beefy computer on 24/7 which I don't really want to do, right now we keep a low power laptop on 24/7 to handle assorted things and I'd like to stick with that.