Before purchasing the LS-XHL I kept my .mkv files on my PC and used a programme called PS3 Media Server which transcoded them on the fly and streamed them to my PS3.
I guess I was after replicating this on the LS-XHL which would require some additional software.
My current workaround is to mux the .mkv file to a .ts file with tsMuxeR (takes about 40 secs for a 1Gb file) and store it on the LS-XHL. The PS3 can then play this from across the network.
The processor requirements seem low, especially on the fly, as it is remuxing rather than reencoding. I would guess it should be possible to put something like PS3 Media Server and tsMuxeR on the LS-XHL solving my problem and making many people very happy.