We're trying to investigate all options at present, right now, there are a few options, and all of them are being investigated in parallel:
(1) backport the mkv stuff from later xine's to ours. niz23 has a version of xine which has this, and it works more a lot more files, a few do slip through though.
(2) rewrite the DCE wrapper for the VideoLan client. One person is looking at this.
(3) write a new player based on gstreamer.
All three have the same amount of difficulty. and will produce varying results, this is the cost of gathering data to produce a solution that works best.
It is important to realize, that LinuxMCE's media infrastructure is like the rest of LinuxMCE, very abstracted and modular, the system does not care what media player is underneath, only that it can control it.