The built in dvd playback is only in the latest two builds of avalaunch. Just go up to the disc icon image like you normally would when accessing a disc from avalaunch, but instead of it sending you to the ms dvd player, or dvdx2, an avalaunch logo appears which then sends you to the dvd player.
You have to enable the dvd player in setting, under main options, in ava.
To see if the movie is running in a higher res, just hit the display button on your remote, or white button i believe on the controller, and it will give you a bunch of settings. From there you will be able to check and it will tell you what res it is in. This is accessed when a movies is already in progress.