[quote name='javeryh']How do you tell if you are using a transcoder? When I open a file I am selecting it from the 360 and using the controller to Pause, FF, Skip, etc. The hard drive is not connected to my 360 (the files are on my laptop and they magically play on my TV without any wires).[/QUOTE]
You aren't using a transcoder. Transcoders are programs you install like Tversity or Transcode 360. What they do is actually convert the video file to something 360-friendly on-the-fly and send it to the 360; in other words, your PC is doing all the work (so you need a pretty nice pc to transcode HD on the fly). Also, if you use a transcoder, your pc can't really be used since it's 100% tasked to transcoding.
What you are doing is what most everyone else is doing. Your 360 is looking at your laptop's hard drive and simply grabbing the files and decoding them on the 360. The only thing your PC is doing is copying files to the 360's memory, which takes almost no work, so the PC can still be used.
As for MKV files to work on your 360 you have two options:
If you think your PC is beefy, try out Tversity and transcode on the fly. I personally have never gotten this to work that smoothly. Lots of pausing and buffering, and the picture degrades.
Or
Get a file conversion program that will turn the mkv file into something the 360 can digest, convert the entire file, then play it like you currently are. - Personally I have done this with mkv's a couple of times but it's time consuming depending on your PC's cpu power (A 2 hour HD movie can take at least 2 hours to convert on an average PC). This is because, essentially, your computer must open every frame in the video, sequentially, and save it as a different type.
I've just mostly stopped dealing with mkv's because of the hassle.
[quote name='espionage']does anyone notice their picture quality when watching avi files on the 360 to be too dark? if i watch AVI files off the PS3 they look just fine but on the PS3 everything is just so dark. I can't seem to find any type of brightness settings to configure either. what's up with that?[/QUOTE]
It sounds like you either already have, or need to, fiddle with the reference level settings in the display settings of your 360 (if you are using a vga cable). Otherwise I don't know what the problem is, they look fine on mine.