I haven't read this thread through but this may be useful - http://handbrake.fr/ You could also try downloading the test files for mpg and avi from this site: http://dougneubauer.com/mhcctest/
You know what I find the best solution to be? Use a Playstation instead. I have PS3 Media Server on my computer, and the PS3 is networked, so on the video tab in the PS3 menu, is my PC, and I can view any video file on it. I also exclusively use 720p MKV files. I could use 1080, but I'm not that bothered, the 720 is good enough for me, but no pissing about with USB sticks, no worrying about CODECs or file types, and I can access all my videos, MP3s and even photos.
Yes and no... The software can be a bitch to get working well, but with the PS3, you just turn it on, and there it is. My TV is also DLNA-compliant (able to look for media servers) but for some stupid reason, it only has the slowest form of network port, so the MKV files judder and pause, as it cannot get the information fast enough. I also have a DLNA-compliant player on my phone, so I can stream music and pictures on that too. It's like Garlic bread, it's the future! I say the software can be a bitch, but it is all down to firewalls and ****, the software is just the case of installing it, and once you see your computer on the PS3 screen, it's job done! I also turned off subtitles, but that was my choice. Don't be scared, if you have the kit, give it a go.
click the middle X button and select media server i think it is. then find your external driver and play movies. very simple stuff
you can convert it depending on what you use as a media server. i used vuze for my xbox but converting takes a few hours so not worth it at all
