PMC only plays back .wmv, you can't update the codec it plays back ...
Windows mediaplayer will convert .avi -> .wmv if you transfer the files through your wmp to your pmc.

If I were you I would just buy a MPM-201, a PVP that can record and playback Divx, it functions as good as the AV420 and is cheaper.

http://www.dapreview.net/content.php?review.199