I don't know why, but if you select "no audio" when opening the file for indexing it seems to index and open without a problem. If not, open the AVS Script Creator from the Tools menu, then use it to open the AVI.
MeGUI should ask you how you want to open the file, and selecting AVISource rather than the File Indexer should work.
Either way, you'll probably have to demux the audio stream and add it to the encoded video manually. I doubt you'd want to re-encode it anyway as it's already mp3. You can extract the mp3 audio from the AVI with
VirtualDubMod (from the "Streams/Streams List" menu if you're not familiar with it). Once you've set up the video part of the encode you can add the mp3 audio to
MeGUI's output using the AutoEncode button.