OK, I very much appreciate this tutorial but I kept running into "problems" so I sort of came up with my own roundabout method of converting MKV to WMV-HD 360 Ready files. Here's the process I now use and that has worked "flawlessly" every time thus far...
VISTA USERS WITH WINDOWS MOVIE MAKER (HD) ONLY:
(Movie Maker for Vista does a fantastic job of converting MKV for the 360 and includes an embedded 360 profile)
1) Uninstall all codecs and then use the Codec Removal Tool 2.12 (I believe) to fix and remove broken codecs
2) Install the Vista Codec Package and leave all options/configuration at defaults (including ffdshow audio and ac3 filter settings)
3) Install Avisynth 2.5.7
4) Extract the standalone WMENicEnc
5) Install the MKVtoolnix and the MKVmerge GUI (if not included with MKVtoolnix)
6) Install Windows Media Encoder (includes the Windows Media Stream Editor which we will use)
7) Install the DPL Frame Effects package for Movie Maker (the only effect used will be the DPL 100%)
After that is done, here's the process I use:
1) Open the MKV in MKVmerge and uncheck the audio track and all subtitle tracks. Set the height and width for video track to the actual height and width of the MKV movie. Then save MKV to a new file which now only contains a video track.
2) Create an AVS file for the original MKV (with audio) and open that file in WMENicEnc. Uncheck the video option and select Windows Audio Pro 10 with a setting like this: 384 (640)kbps 48kHz 5.1 24 bit CBR. This will depend on the sources audio quality. You should at this point reload the AVS file to make sure it saves out the audio as WMA (bug in WMENicEnc?) NOTE: if your audio track is a DTS file you will have to convert it to AC3 first using Tranzcode and BeLight (Besweet).
3) Now you should have a new MKV with just a video track as well as a 5.1 WMA file. You should no longer need the original MKV. Open up the new MKV in Movie Maker by addiing it to a new project. Drag the video to the storyboard. If the source is already 1280x720 you do not need the DPL 100% effect, but if it's something like 1280x544 you will need to drag the DPL 100% effect to the video on the storyboard. Why? Because the 360 profile is always 1280x720 (can't be changed due to embedded profile). The DPL 100% effect fills the "missing" top and bottom 88 pixels with true black versus Movie Maker filling it by default with a dark gray (looks hideous
4) The next step is to publish the movie with the 360 profile. Do this by going to the File menu -> Publish option. Publish to your computer using the custom setting: Xbox 360 HD 720p profile. I have found it takes around 3-4 hours for a 1.5 hour movie, but this can double if you use the DPL 100% effect for 544p MKV sources.
5) After publishing the movie, use Windows Media Stream Editor to create a new file. Since Movie Maker does not publish 5.1 audio, you will open the new published WMV in the Stream Editor and then select JUST the video track. Then open the 5.1 WMA you made with WMENicEnc. Select the video track from the Movie Maker WMV and the audio track from the 5.1 WMA. Then create the new file.
You should now have a 720p Xbox 360 WMV-HD movie with 5.1 audio
I have tested many conversions using this process via network streaming, USB 2.0 hard drive, and DVD+R DL. All of them look fantastic and have synced audio. I chose to go with the 360 profile in Movie Maker as all my custom made profiles produced files that seemed to have stutter issues or occasional sync issues. This method has produced nothing but compatible, smooth playback, 720p WMV-HD, 360-friendly files for me.
If anyone is interested in trying this out and has further questions, plz don't hesitate to ask. I know this has been somewhat truncated and someone out there might not be able to track down all the needed software, etc. I can post file links if necessary. Thanks for reading all this