I too believe that. I think that Pokémon are just shrunken when inside Pokéballs. I also believe that they are in a virtual environment that suits the Pokémon's species and/or nature. I do wonder though how Pokémon themselves can get out of the Pokéballs. Remember it's not just Jessie's Wobbuffet or Misty's Psyduck. During one of the first episodes where Ash gets stuck in a snow storm, he and his Pokémon took refuge in a cave in a mountainside. He forced all but Pikachu in their Pokéballs, but somehow, they released themselves, trying to keep their trainer warm. Unless all of Ash's Pokéballs are broken too, I haven't a clue.
If Pokéballs only work on the Pokémon they caught, then why do some trainers freak out when they see Ash, Misty, or Brock about to toss a Pokéball at the trainers' Pokémon? In that case, the Pokéball should bounce off harmlessly (or painfully, depending on how hard the Pokéball was thrown...) without opening up or anything. Unless the producers of the show decide to include info on the story of Snaggers from Colloseum or XD, Pokéballs just don't work on already caught Pokémon.
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And yes, Pokéballs can catch other things than just Pokémon. (well, at least one more thing) In one of the early episodes, Ash tosses a Pokéball at a Pokémon (forget which, but it might be the Manky episode), but instead of catching the Pokémon, he manages to 'catch' one of Brock's riceballs. (called a 'doughnut' back then...) The wierd thing is that the riceball didn't shrink inside the Pokéball. When the ball opened, there was the riceball, same shape and size and all...