Well, I wanted to do the same thing with video that we did with audio earlier, but I kept running into problems. It seems to be some sort of caching problem with mplayer, but I have a close substitute. We are going to save our output from mencoder to a fifo. A fifo is a special file descriptor that is basically like a cache (first in first out) that the kernel provides. This is probably what allows us to get around what I think is a caching problem with mplayer. We can probably get around this with some cache settings in mplayer. Maybe I can look at this later. I'll post an update if I get it working. 

mkfifo video
mencoder -tv driver=v4l:width=320:height=240:fps=8 tv:// -ovc lavc -o video
mplayer video