My guess is that MMC's file player was/is only equipped to grab the overlay when it was playing the file. 'Least that was my experience with it. Not a great solution if/when forced to use an outdated player with not the best of built-in codecs, and it wouldn't work if your system had other codecs installed as default. This seems to have continued with CCC 8.3, as the Theater mode help says: "Note: These settings will only affect applications with video overlay support". Vista complicates things as noted in other posts -- it doesn't natively do overlay -- so have to switch out of aero.
Power DVD has dual screen support, so might try that, and it works in Vista. Might also look at Microsoft's exhibiter software
http://www.microsoft.com/windows/windowsmedia/forpros/encoder/utilities.aspx
and see if that would work for you.