not just mkv, it will handle any h.264 wrapper, for example I've seen it demoed with h.264 in a .mov wrapper. The XBMC interface isn't super snappy, but it is definitely usable, especially if you need something as cheap as possible. Also, what else would you use for high def movies these days besides h.264? As much as I'm loathe to admit it (because it's a closed standard), it is king at this point.
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BlackHawkBible music connoisseurThere's no place like 127.0.0.1Icrontian
Well I would be starting to download 1080p media but most of my current media is XviD/DivX.
In that case you can't beat the apple tv 2 (not the current model) with XBMC. You can pick them up for about $50 used online or a little more new. I have two in my house and they work great. XBMC is smooth and they handle everything I throw at them, 30gb+ 1080p video with ease. Not to mention you also get everything else the apple tv offers.
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BlackHawkBible music connoisseurThere's no place like 127.0.0.1Icrontian
Went with the Foxconn nT-A3700 in a combo with a 4GB stick of ram for $182. Comes with a VESA mount and the comments on Newegg says it runs XBMC just fine. Specs look similar to the one @Thrax recommended.
Comments
http://hackaday.com/2012/01/24/raspberry-pi-runs-xbmc-reliably-decodes-1080p/
Unfortunately, they're backordered most places.