Do you known if the mencoder package shipped with recent linux distribution is compiled with some sub-titles related option? I'm compiling the latest mencoder (and ffmpeg) from source on by NAS (a netgear readynas), but I cannot get subtitles with either PMS or Mediatomb (which is another DLNA server). So I conclude that the problem must be mencoder.
PC: PMS 1.50 + mencoder (the one coming with fedora 16) -> works fine with hardcoded subtitles on my PS3
ReadyNAS: PMS 1.50 + mencoder (compiled from the latest svn) -> video and audio work fine but subtitles are not embedded, also it seems that the version that I'm compiling from source does not support the options -subfont-autoscale and -subfont-text-scale (I had to remove these options from the code in order to continue). I double checked in the debug.log the mencoder what actually called without these two options.
Same result if I replace PMS with mediatomb on the ReadyNAS. Tested with the same avi video and the same srt subtitle.