First try a re-install of MC. Ogg should be working.
I'll give that a try when I get back home tonight.
Second, verify that it *is* working over your LAN. If it is, we are probably chasing down the wrong path...
How about I put it this way, the logs say it's transcoding on the LAN, the bitrate meter appears as though it's transcoding on the lan (bouncing between 100-300kbps vs 900-1200 for lossless), and looking at the traffic via Wireshark, it's making HTTP GET requests for the files with the appropriate transcoding commands. The one thing I haven't tried is setting it to really-crappy quality transcoding and listenning for the artifacts.
And one further data point, since I'm away from home at the moment, I decided to try using the library server over the internet, but this time to disable transcoding entirely (library server options on the client). When I do this, I can still play WMAL's (takes a long time to buffer though), but if I try to play a FLAC, I instantly get the same "Media Center encountered errors while trying to play the last several files. Please make sure the path in your media library points to the right location." error.
However if I go into the log, get the URL it's trying to play and enter that in a web browser it finds the file and downloads it successfully.
One more data point, as noted above OGG transcoding works over the net for WMAL, as evidenced by the logs showing "?codec=Ogg Vorbis&settings= with type ogg" on the end of the file URL. FLAC files played with "Always convert audio" don't show that. However if I enter the URL to a flac file and manually append "?codec=Ogg Vorbis&settings= with type ogg" to it in a browser, it downloads and converts the file appropriately.
Thanks again for the help, I really appreciate it.