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You have to convert them into mp4 using something like Handbrake. It takes a while but I think the results are great. I have almost my whole DVD collection backed up now.
 
If you go the dvd assist route you won't need to use handbrake, it should just work withe the video_ts folder, thus saving you much time (approx 20 minutes to pull info off of dvd vs many hours of encoding).

For using a networked drive it involves putting an alias in your movies folder. I've not done it but the dvd assist instructions should tell you how. If not try the dvd assit thread over at avsforum.com.

Specificallly this thread
 
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