What are you using the DVDs for? Are you planning on writing the backups to the DVDs or are these the DVDs for software (or movies)? If you're planning on writing your backups to the DVDs then that's probably not the best route to go.
One way to share the DVDs might be to just copy the contents of the DVDs over to the hard drive. Another route might be to copy an ISO image of the DVDs to the hard drive and then mount them using something like DAEMON Tools. Either way the performance is probably not going to be too great for multiple computers accessing the files at once. Using an actual DVD drive will be even slower and as someone else said use up all of your drive bays in the case.
You wouldn't necessarily need to have the programs running off of the centeral server, just have everyone store their data files to the server where everyone else can get at them. This is really going to depend on the software you're using some software will support running off of a central server while other software won't.
I'd second the recommendation to try using a Linux backup server. There are a lot more (and free) methods to do space saving incremental backups with Linux. Check out a couple of these programs:
* BackupPC - http://backuppc.sourceforge.net/
* Rdiff-Backup - http://rdiff-backup.nongnu.org/
* Rsnapshot - http://www.rsnapshot.org/
They'll all let you save multiple versions of files so you can role back to a previous date without using a ton of drive space (they use a couple methods to save only the new/changed files or even only the changed parts of changed files). The only thing is no fancy GUIs, but this is generally something you're just going to setup and let do it's thing anyway, so not a big deal. I've got a Ubuntu server that uses the rsnapshot method and then also do periodic backups to an external HD with rsnapshot.
Will XP work - yes it can, you'll probably need additional software to help out with the incremental/differential backups if you're looking for more than just a mirror of whatever is currently on the main file server. Veritas is the only thing I can thing of now, but I'm sure there are more options. BTW, I'm assuming you're talking XP Pro and not Home - I would guess you could do it with Home, but it may not be the best choice.