Yeah I'm pretty much looking tO avoid that.
Then go Android instead. Seriously.
The best player currently in iOS is XBMC. You have to jailbreak to add it, and it doesn't work great with the HDMI out, but it will play most files. Using my h264 gauntlet (a series of samples I use to test the decoding on all GPUs) XBMC+iPad2 can play most standard files, though it has trouble with extreme bitrates and non-standard encodes (like stuff with crazy reference frames). It will work with most scene mkvs.
If you don't want to jailbreak, or you want decent HDMI out (and not crappy mirroring which is the best any robust player can provide on iOS) you have to convert with Handbrake.
Honestly this is a big reason I switched from iOS to Android myself this year.
I am a big HTPC guy (I am the Hardware Guru on the XBMC Forum) and my wife and I consume tons of mkv material. At home I have legendary HTPCs to do the job, but I got tired of having to bring an ION netbook with me when we wanted to watch content on hotel room TVs. The iPad 2 couldn't do the job, though I tried very hard.
So I bought an AT&T SGS2 the day it was available. It plays EVERY file in my mkv gauntlet perfectly to a TV in full 1080p via MHL. In fact the
stock player can play these files- I only have bought Dice Player to allow for DTS soundtracks. Using a NTFS external drive to carry them and an internal ext2 drive to hold them on the phone I can play full Blu Ray rips (so like 30gb files) wherever I am with ease. The Exynos SoC in the SGS2 is a beast.
Other Android devices don't fare quite as well. The SGS1 is ok, but fails weird encodes or high bitrates. Tegra 2 stuff simply doesn't work. TI stuff seems ok (the Razr's Stock player can play h264 mkvs as much as iPad2+XBMC), even though someone here reported problems with the GNex. Qualcomm stuff is usually pretty terrible, and relies on amazing NEON support to play these files.
The only phone I have found that can play 98% of the files in my huge library is the SGS2. I plan to get a Transformer Prime soon and I hope it can too.