There are many applications that will encode your video into blu-ray compatable AVC. One of the best, and least expensive (its free!) is x264. The easiest way to install and use x264 is by installing MeGUI and letting it update to the latest x264. (MeGUI requires AVISynth installed.)

TsRemux is an application written by dmz01 that re-multiplexes variously encoded bitstreams into ts (transport stream), m2ts (mpeg-2 transport stream) files, and most important for us, blu-ray folders.

tsmuxer is an application written by the gentlemen at smartLabs that multiplexes variously encoded bitstreams into ts (transport stream) files, m2ts (mpeg-2 transport stream) files, and even complete blue-ray structures!