options and arguments is not just significant, it's HIGHLY significant.
To transcode the video, specify the output codecs as the "-vcodec" and"-acodec" argumentssub-options to the libavcodec option (-lavcopts):
<source lang="bash">
$ mencoder -ovc lavc -oac lavc -lavcopts vcodec=mpeg4:acodec=ac3 infile -o outfile