TMPGEnc can't do AC3 audio anyway. So I would have suggested doing the audio seperatly anyway.
Could try ffMPEG. Not the greatest quality, but it is fast and can convert directly from an AVI.
As said, the problem with TMPGEnc is most likely VBR mp3 audio, which TMPGEnc will load as an audio source and then not encode. Although I have seen posts where TMPGEnc has not loaded the AVI as an audio source and people have wondered why it did not convert the audio.