PC Needs to be either Windows 7 home edition or Windows 7 ultimated edition as WMC is needed. Vista or XP media center will not work.
1. Download the free or Pro version of Divx7 from here.
2. Download the free Divx Plus Tech Preview from here.
3. Download the free AC3filter full software from here
4. Optional but download and install VAC3ACM as well from here (explanation below why might be needed)
Make sure you have set up Xbox 360 configured and working as an etender with your Win7 machine.
Install all the software listed above step by step.
Open WMP12 (Windows Media Player), click on Organize drop down menu, then manage libraries, then videos. Add the folder where all your mkv files are stored, click ok and reboot the pc.
Turn on your 360, go into windows media center, then go to pictures & video, then video library, open the folder which you added that contains all the mkv files and push play :-)
AC3 & AAC work fine. DTS works but it's downmixed to 2 channels because there are licensing issues with DTS, MS and WMC. DTS works fine though on the Xbox 360 when you insert and play a DVD/GAME.
The software VAC3ACM that you installed on step 4. is needed because you will find that 90% of your mkv files whether they have AC3, AAC or DTS audio will work fine without that software as AC3filter will do the job fine but on odd occassion some DTS files will refuse to downmix and VAC3ACM will do the job there.