Yes, it's possible to use the Nav screen to watch DVDs, DIVX files, **** files, etc, but unfortunately, you can't just insert a disk into the drive located in the trunk. You will need a video interface, such as the one shown here:
http://www.navvideo.com/navvideo-mod...rgb_toylex.asp
I added a rear backup camera and ran the 2nd channel video input under the carpet and up into the center storage bin. A portable DVD player, or personal media player (such as the Archos 605) works fine. 10 full length films (in DIVX or **** format) will fit on an ordinary 8Gb memory card.
Ours has been working fine for 4 years (2005 Avalon). Quality of the image is excellent on the factory nav screen, particularly at night.
I have not found a way to have the audio play through the factory stereo system, nor an I interested in doing so. I prefer the viewers use earphones so the driver (me) is not distracted.