Obviously, this will simply not do.
So I have taken to recoding .mkv and .mp4-fansubs into plain vanilla XviD's with MP3 soundtrack. On our TV there is no discernable drop in quality, and often the files are even smaller in XviD too.
But it's a lot of work, what with finding out which tracks to extract, extracting and converting subtitle and audio tracks, etc. So I wrote a program that does this for me. It processes all .mkv and .mp4 files, calls auxillary programs for file info, tract extraction and track conversion, and results in a nice jobs-file for VirtualDub. All I have to do is to copy it, and let VirtualDub do its magic!
I love being able to tie several things together to make my life easier. As they say in the world of Perl programmers: laziness is a virtue.