Ok. So I updated to the latest beta of 1.20 (thanks for the link), and while initially there was not a difference (mp4 not playing;"content cannot be played"), I was able to get the mp4 files to play by doing the following:
Each movie file has a folder, in each movie folder there is the "movie.mp4" and a "#--TRANSCODE--#" folder. Inside the #--TRANSCODE--#, there is a folder that contains 3 files, one of them named "movie.mp4 [MEncoder]*" <----This file plays perfectly!
So my question now is WHY? And how can I get these mp4 files to play without drilling down into each folder (I hope to consolidate and have all movies in one folder versus each movie having its own folder, is that even possible?)
OK! So here is what worked to get mp4 files played perfectly without going into TRANSCODE folder.
1. On the PS3, in Audio Output Settings, I only selected Dolby Digital 5.1 ch. as an option (besides the linear ones that are automatically selected)
2. Disabled "Kepp DTS audio in stream"; don't know if this makes a difference, but disabled it.
3. In the "Force Transcode.." field under Common Transcode settings, I put mp4
This way, all mp4 files have the [MEncoder] next to the file name and everything plays.
Hope this helps. Worked for me.