I had similar problems getting Xine dvd5 plugin (using libdvdcss) to play on my Sony Vaio laptop. I had created the /dev/dvd and /dev/rdvd devices and set permissions properly, but it still refused to play.
I eventually figured out that I needed to remove the "hdc=ide-scsi" option from my kernel parameters in order for libdvdcss to read the device. Unfortunately this breaks CD burning on my combination DVD/CD-RW drive, but at least it is possible to get it working. Give that a try.
