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It supports MKV fine. MKV introduced a new compressed header format which required a firmware update from WD to fix though.
I spent tons of $$$ messing with media players(WDTV, Tvix, HDX, DuneHD) and I felt regret. :'(
Quote from: yhsiau on November 23, 2010, 10:32:10 PMI spent tons of $$$ messing with media players(WDTV, Tvix, HDX, DuneHD) and I felt regret. :'(Too bad for you, but I've never encountered any problems with my wdtv live except for some mkv files that were encoded with header compression (easily countered with a simple remux, or firmware update). 1080p files are always smooth as silk during playback as well. To each his own, I guess.
BTW, wdtv product is not good for those movies which has hi bit-rates.