I wish to go for aTV Flash but I understand even installed, ATV could not play mkv files, for example the ones that are in 720p. But then I understand that there is hardware limitation. OK, but then how come you could rent or buy a full HD movie from Apple Store and enjoy it? What format do they use?
Is there any software that I could convert my mkv movies to the proper format so that it will play in HD?
You can convert it AVI will do fine
HD files are supported in formats other than MKV (AVI, MP4, M4V, WMV and others).