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Best answer (Chosen by asker)
If you're having problems opening an .avi file with TMPGEnc in order to encode it into MPEG-1 or MPEG-2 format, but the AVI plays just fine with your Media Player (or any other video player installed on your PC), this is normally the first thing you need to do:
Go to the TMPGEnc's Option menu and select Environmental settings. From there, select the VFAPI Plug-in tab.
There you see a list of various reader plugins installed for the TMPGEnc. The one that's called DirectShow Multimedia File Reader is the one that we're looking at. As a default, its priority is -1. Select the item and right click on it. Choose Higher priority and repeat this until the "Priority" for this item is higher than any other plugin's priority in the list.
Now, your AVI should open nicely.