I assume you have patched your registry to enable DVD library "Gallery" view. ![Wink [;)]](/emoticons/emotion-5.gif)
The DVD Library has its own "watched folders" that you access by right-click in the gallery. However, any DVR-MS files in a "Recorded TV" watched folder that have "WM/MediaIsMovie" set to "True" will also appear in the DVD Library free of charge. These can be dressed up to look like a DVD by adding cover artwork to the folder. The name of the cover art must match the name of the movie file (e.g.: <moviename>.jpg and <moviename>.dvr-ms).
The "Videos" strip is controlled (more or less) by the main set-up watched folders (Set up > General > Library > Watched Folders, I think), but also has some defaults like <user name>\Videos and Public\Public Videos. Also, Windows Media Player has a part. If it finds video files in its search, they get added to the "Videos" strip.
There are certain criteria for a video to appear in the DVD section, depending on what kind of file it is. If you "rip" a DVD, then DVD Library expects a VIDEO_TS folder containing a VIDEO_TS.IFO file. Adding a DVDID.xml file (see dvdxml.com) will get info from the DvdInfoCache.
You may want to try starting over with what folders are being watched. Stop watching everything, then clear the Windows Media Library cache (c:\Users\<username>\AppData\Local\Microsoft\Media Player), reboot and use hard links in the default folders to point to your movies (run command prompt as administrator and execute mklink /d <linkName> <pathToMovieFolder>). See http://thegreenbutton.com/forums/thread/369625.aspx and http://thegreenbutton.com/forums/thread/368514.aspx for some info I have been collecting along the same lines.