I may not understand all of the plot elements in Avatar having only seen it once and it being very complex, but this is my thinking as to how this movie could have underlying plausibility. I haven’t read any online info about this movie (yet)…
In the beginning of the movie we see a crippled marine who, on the surface of it, appears to be in the same world as you and I. He is put into a scanning chamber with some advanced neural technology. This technology appears to be neurally bidirectional; that is, it can not only read the state of his mind but also stimulate his neurons, giving him the fully visceral experience of using his actual body while being in a rich virtual world.
As his avatar and in the virtual world this marine then interacts with natives. It is tempting to think of these natives as purely digital artificial intelligences (and yet no less people than you and I…). But at least one plot element confuses this thinking. In what appears to be the real world it is mentioned that the digital world is owned by a publicly traded company. Therefore it could be the case that each one of the “natives” is actually a human in the real world that is also using the neural tech to enjoy a virtual life. However, I am inclined to think of them as artificial intelligences because of the fact that the natives believe that they have been their for their entire lives. Nonetheless, it could be the case that they have been their for their entire human lives via the neural tech. I don’t believe a clear resolution to this particular question can be had - do the natives have brains in the real world or are they AI?
Moving along, any plausible account of this movie must explain the blending of reality and virtual reality. That is, how is it possible that people and equipment from the real world end up in the virtual world? This is easily explained using a Matrixesque plot element. That this neural technology does exist, but the technology we see in Avatar is not the actual technology being used.
That is, the reality and virtual realities we are presented with in the movie are all virtual. When you use the virtual neural tech you are simply planted into a new simulation which is relayed to your physical brain via the physical instantiation of the tech we see in the movie. Of course, as far as your mind is concerned there is no difference between physical reality, or any level of nesting of virtual realities, so long as you cannot tell the difference. You are a brain in a vat.
Lastly, I must also entertain the possibility that every person, both apparently human and apparently native, are simulations implemented on digital computers.
Both explanations seem to explain the movie and are possible if not plausible. However, I could be missing something… What is your take on this theory, and do you have anything to add, evidence against these theories or an alternate account?
 I have just realized a third possible explanation, which is that all action occurs in the real world that you and I live in. The neural tech simply puts your mind into another body. Does this work??