1) With DVDs, I ripped them as full ISOs. The only modification to the rip I make is to remove "prohibited user operations." I leave everything else intact. I then use the ISOs in Handbrake and rip to MKV files with audio passthrough for all audio tracks and subtitles. (except foreign language tracks). I put the ISOs on one NAS (for backup), and the MKVs on my primary streaming NAS.
2) You don't really need any special settings on the MBL. Just make a Share with your Media in it, and set up users that the WD can use with WRITE access. And no, it's not saying it needs a source that is using a "Media Server." That's something different. It's saying it needs a source that's part of the MEDIA LIBRARY. The Media Library is created via SETUP / SYSTEM / MEDIA LIBRARY / MEDIA LIBRARY MANAGER.
3) It can be done automatically, manually, or "off-line."
Automatic: This is an option in the Setup screens that will scan the WDTV and look online for metadata, cover-art, and backdrops, and if found, will add them to the share.
Manual: When selecting a video file, you can press OPTIONS and select GET CONTENT INFO.
Off-line: You can use third-party software like The XML Fetcher, Hubgen, ThumbGen, etc. to create the files for you; the WDTV will import them automatically when scanning the library, presuming there wasn't content info there before. If there was, you'll need to clear the media library to get it to purge the old info and import the new.
4) Yep, just create separate users on your NAS with access to the appropriate content.