The types of video formats supported by PS3 are MPEG-1, MPEG-2, MP4, AVI, DivX, WMV etc.
There are two such subtitle formats that can be used
1. The XSUB format - where the generated bitmaps are presented as an additional stream inserted in the video file itself. This works only with avi files. In this case another avi is generated that has the subtitles incorporated.
2. The idx/sub format - This format uses a pair of files, one with extension idx and another with extension sub. These files go together and replace the srt in your player.
AVIAddXSubs takes an AVI with XVID/DIVX content plus SRT/IDX/SUB files and merges them into a DIVX container (XSUB) which is what the PS3 supports. PS3 from firmware version 2.2 supports XSUB subtitles.