It should, I have had no problems with it. It reads both Dizx 5 and 4 codecs and I am certain that the older ones it will read as well. You just have to install the codecs on your machine.
In regards to you not being able to play the movies I think that it is because windows media player can't play Divx 5 yet. In fact, in order for me to play divx 5 I have to use the Divx 2.0 player that you get off of the Divx web site. It comes in the Divx 5 pro bundle and is for free. The real problem is that in order to use it you have to install GAIN wich is a completely evil program seeing as how it dissapears completely and many people could have it installed and not even know it.
Hope that helps.