Your solution should work in WinXP, after all mencoder.exe does not have that much a specific windows dependent code.
I believe VC1 problem is related to WMV Pro encoding, its closed source implementation. Opensource projects have been trying to reverse engineer it, some succeeded some failed, some implementations lack features. I think this summer 2009 came to light first real implementations to run VC1/WMAPro videos, so expect to see it in FFDSHOW package sometime later.
MPlayer project has always been good at supporting vc1 pro implementations, its what I use to batch convert all VC1 wmv videos to widely supported avc/aac files.