Yes, the Saturn plays *.CPK, *.AVI, and *.MOV movies. You can download CPKview (*.CPK movies) and True Motion Player (*.AVI movies) from the Saturn Utilities section on the Miscellaneous page. I'm not sure what can play those *.MOV files since QuickTime didn't work when I tried it. There are more Saturn file types listed there too.
Yes, there are two ways i know of: The best one is to buy a VCD-card and plug it into the Saturn. Then you can burn your own movies and watch them on the Saturn. There is a harder way also : You can use a codec or something like Fmv or Tmv from another Saturn game (or programm your own), and then let it play a movie. I have heard that this is possible but very hard.
If you want a movie for Saturn i can suggest Enemy Zero which is a very nice Sci-Fi horror adventure with amazing quality on the video.
did you remember to write an avi player, compile it and burn it to the cd as well?
or use the magic fairy powder to enable the saturn to magically read a video file that it doesn't recognize at all otherwise, unless you happen to have encoded it in the saturn specific saturn avi format?