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The transformation is applied in the wrong place: i.e. AFTER the term in the original language has been found.
But at that time, the search in the locales_target has already failed because the argument contains the dashes. Furthermore, if the query is successful, then the transform must not be applied another time.
The proposed applies the transform also in the localized search adding a new argument to the function i18nviews_locale_source.
Then, if the search is successful, put the transform flag to false, because we already have the term without the dashes.
See the attached patch.
NOTE: this patch already contains the one proposed in http://drupal.org/node/1786876