You install an MCE compatible DVD decoder - my preference is the nVidia Purevideo decoder, but there are others that are compatible.
The decoder from Hauppauge Interideo decoder is what is called a non-CSS decoder. It doesn't decode the content scrambling system used in DVD's to protect them from copying - this is why it works with MPGs but not DVDs. It's not also not 100% compatible with Media Center and can cause fatal crashes in ehRecvr.exe.
Cheers,
Andy