Tried Quicktime X. (Already had Perian installed). Quicktime will not load mkv's. After cranking for a long while, I get a message saying I need to use Quicktime 7. Tried Quicktime 7 and it loads, very slowly, but it does load. Playback is extremely uneven with quick pauses all over the place (even though the file is completely loaded). And I didn't even get to the AirParrot test. Unless someone has more info on what I should do using this route, it was a failure for me.
Update: I tried using VLC with my GeForce 9400 on. It seemed to help my CPU usage. With my normal apps running, the CPU idle was at 40%, with no other apps running, it was around 50% idle. Airparrot was set to 720p and highest quality. Unfortunately, there was still a very slight jitter (it almost looks like slow motion). I also tried hooking the HD directly to the MBP (normally connected to the TC) and connecting the MBP to the TC by ethernet. Nothing seemed to improve the jitter. It is slight, but it is there. I find it hard to buy that it is not enough CPU to do on the fly transcoding, when my CPU is at 50% idle.