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A few things wrong/confusing about what you've just said:
XBMC plays back DVD ISOs or DVDs in a VIDEO_TS folder just fine.
MKV is a container and does not require transcoding. If you wish to place your rips in MKV containers it will take only a few seconds to do.
From what you've said, I'm not sure if you've actually tried to playback your DVD rips or if you've just assumed they don't work. If you've tried and haven't gotten it to work, tell us what you've tried.
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I appreciate the time you've taken to reply, perhsps I'm mistaken, but I didn't find support for "raw" VIDEO_TS Files / Folders in XBMC (or PLEX, for that matter). I'll take some time and test this again, appreciating the customization possibilities of XMBC and hoping also to find a current "Cover Flow" skin.
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spiff
Team-Kodi Member
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well, it is supported and has been since 2007.