well first off, welcome to the crazy world of HTPC's. =) And nice setup, btw.
I am in a similar situation but I have a 1080p projector.
There really isn't a "best" way to store and watch your dvd's. Personally, since i have a fair amount of hard drive space (2tb) i rip the majority of my dvd's in full quality with DVDShrink (no compression to Video_TS folders). every software dvd player can play the files and if i ever lose my original dvd, it is simple to burn a dvd video disk from the video_ts files.
one quick note, there have been a ton of posted problems with ripping hddvd/bluray's to your computer. it can be done but it is definitely not as simple as ripping a normal commercial dvd. check out doom9.org and videohelp.com for some hddvd/bluray ripping guides
I have had mixed results with MCE and my ripped movies. I have used MyMovies plugin which has been pretty nice (the included collection management software works fairly well) and my only complaint is that it is a tad sluggish and somewhat buggy in MCE. But it's free and does what it says. I'd suggest trying it out.
If you want to step up in the world, i would suggest checking out Cinemar's product line. Specifically, MainLobby, MLServer, and DVDLobby. I posted my thoughts on it in a different post:
there actually is a trial for DVDLobby (i am testing it out now). go here http://www.cinemaronline.com/requesttrial.html
and request a free trial. It is slightly restricted (watermarks, 120min max play time, etc) but it gives you enough to get a feel for the program and whether or not you would buy it. Just to note, DVDLobby requires you to download MLobby, MLServer, and of course DVDLobby. you must download all three.
My experience and thoughts on the MLobby suite (including DVDLobby):
1. This is not for the faint of heart or of the technologically challenged. I run a computer consulting company and it took me a good hour or two just to start cutting my teeth on the programs. This is NOT a set it, point to your movies folder, and be done with it program. There is a steep learning curve.
2. Expensive. for MLobby, MLServer, and DVDLobby it will run you $260. That stings a little bit, not gonna lie when you can download something like Xlobby or MCE + MyMovies and get something that works for free.
3. It is unbelievably powerful. you are only limited by your imagination. literally. i mean there is a design component where you can build and edit screens, create buttons, literally design whatever you want. really amazing stuff.
In short, it is the most professional, "elite" HTPC software i have ever used or seen. There is nothing (that i can see) that this package wouldn't be able to handle. If you want the best, then look no further. The problem (for me at least) is three fold: do i need the best, can i afford the best, and do i have the time to setup the best?
those are the questions you have to ask yourself. If you are serious about your HTPC and want to really wow people not to mention wow yourself if you ever get it setup correctly, then go for this setup. Personally...i have messed around with every HTPC program out there and i think i am ready to step up with the big boys. $260 is a lot of money to think about SOFTWARE but when it comes down to it, what do you use the most on the HTPC? what do you SEE the most? Software. It's really the only thing you can show off. "yea, my HTPC has the new hitachi 7k1000 1TB hard drive." well that's nice, but no one can see it and to the untrained eye, you're running MCE which the 12 year old down the street has.
just my thoughts... =)