BeyondMedia plays ISOs directly from a large library of ISOs (what I currently use) and there are MCE plugins that do the same. The problem is those programs blow for managing large music collections which is why I was attracted to MC. Between my wife and I we have nearly 1000 CDs that I have extracted to APE or FLAC for archival purposes. As you can imagine, my disk space requirements are in the multiple terabytes, but I don't care. Disk space is cheap these days.
I do have a program that I use to mount the ISO to a drive, but I do not know of a way to tell MC to import the ISOs, launch a simple script to mount the image, and how to tell MC the file is a movie so I can associate other goodies with it like information about the movie.
I should send a screenshot of what I do today with BeyondMedia. It might give you some ideas, but the rest of that program blows so I'm really hoping to figure out how MC can handle a hefty movie library that I've already built. It's like the only thing MC doesn't appear to do to be the perfect media center. I thought it did it. I was reading some folks on the MC11 forums that do this today using a DaemonTools script, but they didn't post how they did it. Since i saw no discussion of this at all on the MC12 forums I naturally assumed (my mistake) MC12 had already solved it natively.
Scott