my program,
http://acidrip.sf.net can use mencoder to do this for you (i know it say's it's a DVD ripper, but it can also accept file input) but the mencoder interface is also simple, i don't know what command you're using for mencoder, but i'd think that what you think is an error, is actually not and you're reading the wrong lines. if you wish to persist using mencoder, try this:
Code:
mencoder input_file.mpg -oac mp3lame -lameopts abr:br=128 -ovc lavc -lavcopts vcodec=mpeg4:vhq:vm4v:vbitrate=800 -o output_file.avi
this will enocde a divx5 / mp3 avi file for you, at 800kbps for video 128kbps stereo audio.