Using xine (the default behavior) these files are nigh unwatchable, green blocks on the left side of the screen, audio cut outs/sync issues. I gather from web searches that this is just a problem inherent in xine (and hasn't been addressed in the nearly 2 years it's been known about).
Then, much to my relief, I came across some mentions on mplayer replacing xine in lmce. I misunderstood at first, and have come to realize that it's only for Blu Ray and HDDVD playback. I did some experimenting, it seems that setting the subtype to "HD 720" or "HD 1080" doesn't matter, and still launches xine as long as the type is still "LinuxMCE Video File". But if you change the type to "LinuxMCE Blu-Ray Disc" or "LinuxMCE HD-DVD", mplayer opens (HURRAY!), and promptly crashes (D'oh). The crash log is identical to the one here. Then, for some completely unknown reason, I decided to rename an *.mkv file to *.m2ts, which actually allows lmce to correctly launch mplayer and play the file. PERFECT!! Or not...
Fast forward/Reverse/Skip forward/Skip back all crash the player outright (only relevant line in the mplayer log that I can see is: [format] Sample format big-endian AC3 not yet supported ). Pause/Resume bring up the standard lmce timescale OSD (not sure what the name of that thing is), but completely blacks out the video and doesn't actually pause anything (the audio continues at least). Pressing play gets rid of the timescale OSD, but the video is still black (and audio still continues like nothing ever happened).
Is there a known fix for any of this mess possibly? Is the mplayer DCE device just in early development still? I've been struggling with it for the past couple of weeks, and so far I've got to the point where I have to rename all my files and not pause, fast forward or rewind . Still... It's a much better interface than mythtv for non myth media .