Hate to say it but: No it won't work.
The Xbox 360 does not look for .srt files. It only plays the Avi file.
If you want subtitle files then merge them beforehand or use a Transcoder like TVersity or PS3mediaserver. You can find an overview here: http://xbox-scene.com/tools-xbox360.php
The disadvantage of using a transcoder is you need a good CPU. Your computer will play the file and outputs it to a WMV with the subtitles embedded which will be send to your xbox.
There are lots of manuals on this on how to set it up.
Don't use the MCE option on your xbox but the Video under "My Xbox"
The Pro of using a program like TVersity is that you can add streaming radio's to the library and you can listen to them while gaming, it would replace the in-game background music you normally hear but you still hear the talking and environmental sounds.. (which is good otherwise you don't know the story lol)