As described in my original post, using any transcoding method in the forms (yes I've tried over 10 methods...) from flac > ogg, if the stream is interrupted (ie data connection lost or wifi enables/disables during the stream) playback fails/stops on the android device and never recovers leaving a corrupted file on the SD Card.
It's particularly annoying because you have to manually delete the file or subsonic thinks its fine and plays back the damaged file that cuts out at some point.
It happens on both my Nexus One and my Atrix using wifi and 3g AT&T connections.
I'm running Debian Squeeze with a clean subsonic install. I also ran on Debian Lenny before with the same issue. I'm using an E3000 linksys router with DD-WRT firmware if that matters.
Many people claim their ogg transcoding is working, and for me it does perfectly until you interrupt the stream (intentionally or lose cell data service temporarily). On the same server/client with the same flac files transcoding to MP3 always recovers the stream if the data connection is interrupted so I know my setup is sound.
I'm about to give up on this and just settle with MP3 transcoding

My guess is that it's the Android client not reconstructing the stream properly upon opening a new connection to the server, but I really have no evidence to support this.
It would be so awesome if someone could repro my issue to help me debug. Since I haven't got much help from Sindre (I know he's busy), I'll even put out a bounty for whomever solves this if necessary. If this is fixed, subsonic will be the only streaming media server that supports gapless playback on an android device.