[Booyadude]

Note: Take a look at PS3MediaServer as an alternative to conversion if you're trying to play it on your PS3.

Phase 1. Make sure you have the latest CCCP installed - http://cccp-project.net/
(Make sure to enable "Autoload VSFilter" in the CCCP options).
Also, take a look at the AnimeTake FAQ(second question) to speed up h.264 decoding, and subsequently how fast you can reencode your h.264 files.

Phase 2. Download and install XviD4PSP - http://www.videohelp.com/tools/XviD4PSP

Phase 3. Open MKV(or other) and select a preset for what you want(e.g. AVI/iPod/PSP/PS3/360, etc.) and then the quality level you want. (higher = slower)
Note: If you select plain "AVI", the resolution will not change by itself, so go to the top menu and select Video>Resolution/Aspect, then change it to a resolution like 704x400. The lower the resolution, the faster it will encode.

Phase 4. Press "Encode".

Phase 5. ?????

Phase 6. Profit.

Protip: Use this instead of AlltoAVI, Any video converter, SUPER, etc. for proper subtitles.