How can I convert MKV files and burn them to DVD? I have a 5+1 theater system(can use USB or DVD) which doesn't support MKV play. 

How can I use my Mac to burn the .mkv files into high quality dvds ?
You could convert the mkv file first with something like Handbrake or iSkysoft's iMedia Converter, then burn it to DVD. Handbrake and iMedia Converter will give you more options for converting than Toast.