One of the Roku engineers has confirmed that an active network connection is NOT required for USB playback. The tech support person gave you incorrect information. See the following thread:
I know that doesn't solve your problem, but at least it rules out one possible cause. If your box is still under warranty, I'd push for a replacement as much as possible. With all the rebooting you're experiencing, I would suspect you have a defective unit. It's definitely not supposed to behave that way, that's for sure.
To be honest, I've given up on my Roku streaming my MKVs, too much frustration.
It's obviously in a beta mode and I don't have the patience to be a tester.
I've since gone back to my Samsung USB and my plasma's ConnectShare feature, it's playing back my MKVs much better.