Thanks for the tip Andy it got me far down the road :-) After a bit of messing around I came up with a good .mkv profile that really works. The video quality is good and as soon as I check the box for x264 Interlaced encoding those annoying horizontal lines that I can't get rid of in .wmv transcodes disappear completely :-)
What I can't figure out though is why the .wmv files that I've been transcoding on Windows 7 always have those interlace lines. I thought it was because I got a new (larger) TV and didn't see them before but I just watched a whole bunch of shows that I transcoded from back when I was running XP and....those lines aren't there and they were converted with the same prx profile.
Is it possible that something .wmv related changed between XP and Windows 7? Could it be the encoder part of Windows 7 was changed or something?
I'm just curious, although I would rather keep the metadata that I get with .wmv then use .mkv However, at least I'm not stuck anymore :-)