Most of the movies I view have been reencoded to avi. When I use Magic ISO to create an .iso file of a movie, and then try to run it on XBMC, it doesn't play. I've tried creating the iso containing both the audio_ts and video_ts folders as well as just the video files under video_ts. It seem every way I create the iso it won't play. My question is, what is the best app to use to get a good play in XBMC. TIA.

why not just play the AVI files directly?

I guess it's just a know-how thing for me. Kinda buggin me that it doesn't work.

img/iso support is just for proper authored dvd's. ie you must make a full dvd out of the data. if you have the video_ts folder with all the proper ifo/vob files in them you can "burn" a udf dvd with those on using an image recorder in your burning software. if not, you will need to find a program that can author dvd's for you wich isn't that easy to get.

Thx Elupus, that sent me in the right direction. I used nero and found the udf dvd for which to burn the iso image. I also found this comment out there;
Select menu "Recorder" and then "Choose Recorder"
Another window will open, displaying all the available recording devices. One of them is called "Image recorder". Select that one and click OK.
Now you can create your image and "burn" it as either NRG or ISO.

Another thing I found interesting was this pictured below. What's this about the Xbox Compatability Mode? Check it for the heck of it. The iso now works in XBMC.