I can open VCD MPG files just fine with it. I havn't tried SVCD MP2 files though. Are you sure its in a fully supported SVCD format, meaning it has a resolution of 480x480 and is an MPEG-2 format.
I think all video files must be in one of the following resolutions before TMPGEnc can convert it.
720x480 (DVD NTSC) - 29.97fps
720x576 (DVD PAL) - 25fps
480x480 (SVCD NTSC) - 29.97fps
480x480 (SVCD NTSCFilm) - 23.976fps
480x576 (SVCD PAL) - 25fps
352x240 (VCD NTSC) - 29.97fps
352x240 (VCD NTSCFilm) - 23.976fps
352x288 (VCD PAL) - 25fps
I may be incorrect, but I dont believe that TMPGEnc can work with any other resolutions than those listed here. If it is something weird like 320x240, 160x120, or even 640x480 then it wont work.
Here is an awesome resource if you don't know of it already.
http://www.vcdhelp.com/
More specifically, these can help you convert resolutions with Virtual Dub.
http://www.vcdhelp.com/mjpeg.htm
http://forum.vcdhelp.com/viewtopic.php?t=89899