I use iflicks, it supports subtitles and is really fast when encoding, it adds complete metadata with video cover, everything is conviniently automated.
http://www.iflicksapp.com/
http://www.iflicksapp.com/
I'm surprised no one has mentioned this already, there is an app for this:
Sub Video Player
http://www.subvideoplayer.com/
Anime conversions usually take less than 30s with their desktop software since all it is doing is remuxing the file. No conversion means no re-compression means perfect video and audio quality. Subtitles, fonts and chapters are all copied over. The actual iPhone/iPad player app supports the ASS sub format (found in almost all anime mkv) so you get all that fancy fonts, styling and even karakoke. Subs are not burned into the video so you can turn them off directly in the player if you want to go raw.
If you just want basic text, then Air Video and VLC works. But expect it to be a bit messed up when it comes to karaoke and don't expect any fancy subtitle positioning. Air video also recompresses the video so there will be a little quality loss (though you probably won't notice it).
Based on my experiences, VLC isn't quite up to the task of playing 720p mkv's yet. This isn't the fault of VLC, basically the iPhone/iPad just isn't powerful enough at the moment. I imagine in a few generations, VLC will work great with 720p videos.
The only reason Sub Video Player can play videos in 720p is because it is using the iPhone/iPad video hardware acceleration.
does this actually work with all files? I've read reviews saying it doesn't work with some files...