Yes, but it must be burned as a CD, not an MP3 file disk. Also, don't put those adhesive labels on them, it jams them up. But all home-made disks should work (I've tried it) - be sure to close your burn session, that's the most common cause of errrors.
wonder why they still are not putting in ones that read mp3. probably something to do with the feeling that too much mp3 music is pirated. certainly not that it would be expensive to do or anything...
They probably ordered enough of the current CD head units (standard and premium) for all the 2004 cars they are going to build. No NEED to change just due to customer complaints, because I doubt MP3 is on the want list of a majority of Prius owners. 2005's may see the feature if Toyota still monitors these forums, since it will fill a need at hopefully not too much of an extra expense...