I don't think there'll be a lot of issues with pulling them from the server, and it would make things far more flexible if you want to make changes. And we'd have to make a special version for getting them locally off the card as well, so unless there were serious issues we'd prefer not to go that route. If a PPC can handle pulling down images then I'm sure this guy can.
They do have on-board ROM on the device, but it's limited so you'd probably need to put our DNV on a card in order to leave room for future expansion of their own code.
The only major issue is lack of support for alpha blending in the compact framework. So, as mentioned above, you'll need to pre-draw the backgrounds with various buttons and such you want to use on a given screen, unless you are willing to do color based tranparency which requires a hard-edged blend. If you are using a flat color fill then you can just pre-do the buttons against that color of course and just capture some of the background around it and it'll blend in just fine. But if you want stuff like the image above, and like your stuff looks, then you'll have to draw them in.
You can though, by being clever about it, create pressed images for the buttons that only include the inner part. The inner part usually has a hard edge around it, so if you generate the pressed image with a background similar to the color surrounding the inner part of the button (often a black contrast color) and allow it to anti-alias so that the edge picks up some of that background, then you can do color based images for the pressed stuff and it looks ok. Since they only see it when the button is pressed, it makes less difference if the edge is a somewhat more ragged than it otherwise would be.
We used this scheme in Mark's PPC system (see the Palm Of Your Hand gallery on our web site.) We predraw all the backgrounds he needed with all the buttons in place, made sure the inner (glassy) part of the buttons had a reasonably hard edge (of gray in this case) and generated pressed versions of the glassy parts against a gray background with anti-aliasing. It works pretty nicely.
Oh, and the issue with pre-drawing the images into hte background isn't a DNV thing, it's a compact .Net Framework thing. If you run the DNV on a standard client that's running the non-compact version, it can do all the usual blending and such.
When the DNV asks for images, it tells the XML Gateway Server whether it can accept alpha or not. If not, then the server generates a color based transparency image on the fly from any alpha based images. So for things like the Weather Channel images, this lets the DNV display these images. They don't look nearly as nice, but they aren't too bad. But for the most part you'd want to avoid that, which you can do by just avoiding the use of any alpha based images as much as possible.