I visited a friend lately who had a HDD device connected to his TV.
To save space, he just converted his original DVD movies into AVI format and stored them on the HDD.
I just converted some of my DVD's to my PS2 with the software and tried it out with SMS.
Everything was running flawlessly with DTS 6 channel surround sound and
a good picture (i thought it will be crappy after you compress it from a
DVD to about 1200MB), but it's ok and it also copies the original sound track
without any compression of the audio file.
You even can include two different sound tracks (languages) into the AVI file,
which are both accessible by SMS.
I have tested it on a v5 board with the latest SMS and also with
SMS v2.3 Rev2 (but i didn't test it with v2.3 Rev2 on a v3 or v4 board, so
i can't tell if it will work on them).
The tool is here and it's freeware:
You also need this one (maybe you already have the codecs):
To make it compatible you also might need the latest anydvd
depending on the source.
There is a help file included, where you can get some info how to adjust it.
Anyways, it might take some hours to convert, because the software also makes a second pass.
But the outcome is very good