I don't much care for VLC, so don't use it except for testing purposes for the forum. That said, no problem here with 720p .mkv files, fully upgraded KDE 2010 release, as of today. [root@fatman ~]# uname -r
Playing .mkv file from the History Channel Universe series;
Sorry about the picture size... that's what it opens to when selecting Open With --> VLC media player
from the right click menu.
It gets a bit rocky on parts of the 1080p sample, (video staggers, severe artifacts, etc) while SMPlayer plays it perfectly, which is why I prefer using SMPlayer as my default.