Media Center is independent of the Xbox dashboard. That's why with Vista you couldn't play Xvid in WMC but you could do it in the dashboard. Windows 7 Media Center now supports AVCHD which is H.264 + AC3. I think I was able to play 5.1. I will check that later today.
Mate, u're doing it wrong and don't understand a lot of stuff, let me show u it ...
As AB already wrote a lot of interesting stuff, I'm gonna add some stuff to this thread since I own both consoles and know my way around playing mkv on both.
1- The xbox CANNOT play 5.1 AC3 out of the box.
2- The xbox CAN play H264 content up to profile 4.1
3- The xbox CANNOT play files with a DTS track AT ALL ! ( except DVDs and HDDVDs if you still have one )
4- The xbox CAN play H264 files with an AC3 track once the profile is changed ( see n°2) and the AC3 track downsampled to AC3 2.0
5- when playing H264 content, you're limited to 1280*720.
6- The only way to get 1080p files, with 5.1 sound, playing on your xbox is to transcode them to WMV9 or 10.
7- The only software you'll ever need for converting/transcoding stuff on your 360 is GotSent ( A LOT much simpler than mkv2vob if you only got an x360 ).
That's all I remember now
P.S. : for all misinformed dudes out there check this link straight from msdn : CLICKY