Couldn't locate decompressor for format 'FMP4' (unknown)
VirtualDub requires a Video for Windows (VFW) compatible codec to decompress video. DirectShow codecs, such as those used by Windows Media Player, are not suitable. Only 'Direct Stream Copy' is available for this video.
This may be because mencoder's libavcodec sets the AVI's fourcc code to FMP4. (Perhaps you don't have a decompressor for FMP4 exactly?) A hack is to force it to use XVID, which is practically identical:
mencoder input.avi -o output.avi -ovc copy -oac copy -ffourcc XVID