AVG 2012 must be going crazy then.Try using PSP Video Converter.
http://pspvc.nswardh.com/
It hasn't been updated for awhile but it's free and has no watermarks.
You can even convert softsubbed mkv to hardsubbed mp4.
The download file contains a Trojan Horse.
Scanned it with NOD32 and there's no trojan.
I've even had it installed for a long time and no issues since then.