I've spent the day testing / using an app called Air Video.
Essentially it allows on-the-fly transcoding of most video formats, to ones that Apple devices understand.
Basically, I've ripped all my DVDs and Blu-Rays to .MKV and this app allows me to watch any of the movies with around a 30 second buffer at the start - great if you don't fancy re-encoding your library or have limited space on your device.
For example, I use around 12GB of my iPhone 16GB for music, and the rest for apps so this is a great way for me to laze around and quickly watch a film or TV show without worrying about syncing.
For reference I have 6TB of rips now.. all which are ready to play on an iPad. Nom nom nom (using the transcoding option).
£1.79 in the app store