If video conversion is not working problem is with mencoder/ffmpeg installation. To confirm this, you need to check your debug log and ask your host to run the command on SSH prompt or you can run the command yourself with PHP script.
For more information, see
http://forums.buyscripts.in/viewtopic.php?t=351
You can find conversion command in templates_c/debug.txt file.
If you can post the url of your site, i can provide the exact command used for converting video, so you can ask your web host to run it on the server to see if conversion working.
If conversion is not working, the software is not properly installed on the server.