Hi crizz,
First of all, let's be clear: Strato is part of Kaleidescape's Encore product line. Encore systems do not import any disc media to hard disk. The only movies stored on the hard drives of Encore players or servers are from the Movie Store.
What Encore systems do with the DV700 is to "catalog" discs -- the discs show up in the onscreen display, and if you go to play one, the DV700 loads the disc into its optical drive and sends the digital bits over the network to the player for playback. It typically takes 20-40 seconds to load a disc, depending upon whether a disc was already in the drive, etc.
It's very important to note that while Alto players behave as I've described above today, Strato's support for the DV700 is not yet finished. This is what Kaleidescape engineering was working on at the time that work stopped and staff were laid off. Hopefully this work will be able to resume and the feature will be completed, but right now, Strato cannot play any optical discs at all.
Finally, with respect to the M700, yes, an M700 will work in an Encore system. The built-in player will be disabled, and the M700 will act just like a DV700.