sorry for the confusion and delay guys, here is the reult.
I tested the minute long clip and it did work fine in SMS, however the large 800mb file would not, it behaved as i have described in my previous posts.
Reconverted the large file and this WILL play from USB but NOT from dvd which is odd. Some have suggested buffering issues, could this be an issue?
Fat PS2 with Network Adapter - 120GB Maxtor HDD - Kingston 512Mb USB Key - Retail HDA 3.0 (HDL 0.8b ISO) - Multi app ISO (ULE v4.12 & HDL 0.8b) - SMS V 2.1