XenonMKV gets round this problem by allowing you to play videos in the Matroska format on the Xbox 360. It doesn't involve any lengthy or annoying transcoding however - only the video is downsampled meaning the video remains in perfect condition. This not only preserves video quality but makes it much quicker than normal MKV files.
Unfortunately, due to the makeup of the Xbox 360, the MKV files that are produced do not replay in surround sound which is something that Microsoft will have to address before you can do so. However, it's the video quality that you'll use for XenonMKV for because it's tailored for Xbox 360 video specifications.
XenonMKV is perfect for Xbox 360 owners who find themselves with a mounting MKV file collection that they've only been able to watch on their PC up until now.