Matroska is just a container, like AVI or MOV, so it could contain a
wide variety of video types. I read your post above as you're
transcoding on the fly between the MKV contents and AVI or similar.

That can be very CPU intensive, one reason you're seeing stalls /
choppy playback is either the CPU isn't up to the job, or the network
isn't.

That wouldn't be the case for 512kbps, but then that's not really
close to good enough for SD PAL or NTSC video - the network would be
find but the actual converted content would be lousy.

The PS3 supports HD video, I think up to 1080p but definitely at least
720p. So you should be aiming for a conversion near to that if you
have HD content - but we don't really know anything about your source
files.

It could be a case of garbage in = garbage out , eg the original
bitrate or frame rate is too low - or that you're taking e.g. a
youtube quality video and upscaling it to fill a TV screen (which will
always look terrible)

So I guess ultimately it's unanswerable without knowing somethnig
about the source video, such as the pixel dimensions (PAL is
720x576-ish at 25fps) and if you're trying to play back full screen or
not.

HTH
Cheers - Neil
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Digital Media MVP : 2004-2008
http://mvp.support.microsoft.com/mvpfaqs