Transcoded files are stored in a hidden directory called .cedata on your harddrive. Your original files are not altered in any way. Right now there isn't a great way to make it possible to see transcoded files on the web and originals locally unless you're using your PS3 or Xbox - you can choose which version to see by changing the transcode setting to never (forces the Pogoplug to show the original) or always (forces the Pogoplug to show the transcoded version).

Unfortunately there isn't. I have many photos and videos being moved to a Pogoplug right now, and the thumbnail generation is indeed slow. For video, a transcode is somwehre between 8-10 frames per second, or about 2-4 seconds to transcode for every second of video, so it does take some time.