I also had the same right problem with DrDivX and SP2. Mine seems to be contest menu related, as the 1.0.5 program has that option. I downloaded ShellEx View, freeware, from here:
http://www.snapfiles.com/get/shellexview.html
Run the app, when it shows all the context menu entries, scroll down to EncodeDivXContextMenu Class and disable that entry. That fixed my problem in a hurry.