Hey, i had the ideia of posting this tuto so you guys can watch your HD movies on your 360 through an external hard drive.
Heres the deal:
1º step: download
Encode360.
Beware you will need the following requirements so this can work:
Net Frameworks 2.0
Windows Media Player 11
Windows Media Encoder 9 (this one its very very important cause is this codec that will allow to convert to wmv format).
2º step: uninstall all codec packs that you have installed so theres no conflict whit the new ones.
3º step: install encode360, this program will also install a codeck pack for you.
4º step: open encode360, click on '+' and add the desire mkv file.
5º step: go to 'advanced' and add the option in fddshow so the program can put the subtitles while converting the movie. (no need if the movie is in english of course)
6º step: still in advanced menu specifie the desired video bitrate and sound bitrate(i put the options like they are in the original file).
7º passo: Choose wich codec will be used.
WMV8 - quickest conversion and good quality
WMV9 - not so quick but better quality
WVC1 - best quality at expensive of speed conversion
I recommed use the 2º codec, altough i've used the 1º and quality is still 99,8% of the original

. (later i'll put 2 pics so you guys can view the diferences between the original mkv and the converted wmv hd).

In Mode option leave the 1st one, cause the 2nd takes to long.
8º step: leave the advanced menu and choose the desired resolution(i use the resolution that is used by the original mkv movie).
9º step: clck on 'Start' button and wait for the result. By converting to wmv hd you will not only have great hd video as also 5.1 sound if the original mkv has as well, this dont happens if you convert to mp4.
I converted lord of the rings in 720p and it tooked about 8h on AMD Turion64 with 1GB ram using codec WMV8.
Later i will post 2 pics of MKV and WMV HD so you can see the diference. ITs almost none, because i used the WMV8 codec the quickest one, if i used the WMV9 im sure that it would be 100% the same, but 99,8 % is very good as well

.
I was very excited with the fact that i can watch HD movies on my 360. Im gonna put some HD DVD and BlueRay on my external HDD too.
I guess thats all, hope i didnt forgot anything.
I have to go now or my boss will kick my ass.
Hope i could help the 360 community.
Cya!!!