Playstation 3 DivX and Subtitles
Good news everyone. I figured out the answer to the problem. It's a little bit tricky, but let me explain the solution (I plan on making a full entry on this on my blog/website in the future) but for now here is the way to do it:
1) The PS3 CAN in fact play subtitled DIVX files, but the key here is that the files must be linked. There may be a way to play external SRT/SUB/IDX but I haven't yet figured it out. For now the files must be linked (but not hard-subbed...there's a big difference).
2) Use Google to look up a program called AVIAddXSubs v8.0. Essentially this is a program that creates "Xsubs" which are soft-subtitle files for official DIVX and XVid files. This works much in the way that it would with a Matroska (MKV) or OGM video file, but it's used with Divx containers.
3) Using the program you now have FULL control over the subtitle options. You can change the font sizes, colors, fonts, etc. as well as support for several subtitle files within one movie (meaning if you want to have say Japanese/Chinese/English/Korean/Spanish subs on one movie, you can).
4) The program will take your original video and the subs and merge them into a new file that ends in the .DIVX extension. You can rename it to be .AVI if you like, but the PS3 does recognize the .DIVX extension regardless.
5) Once you have the new file that's been created, you can load it to your PS3 however you like (streaming it, copying it to harddrive, playing on external USB drive, burning to disc, etc.).
6) Play the video file and once it's playing press the Triangle button on the controller to pull up the menu options. Go over to subtitles and you will now find that you can toggle between the various languages there. How cool is that? ^_^
If you have any questions guys, feel free to ask.