Hmm, try another version of VirtualDub, like AC3, or MP3 and Video Freeze, or VDub MPEG2, or MOD? Can you save out a WAV file if you load one at a time? BTW, in Direct Stream Copy Mode, compression WILL be grayed out, to access it, you need Full Processing Mode. I know, VirtualDub is kinda counter-intuitive when first learning how to use it. If you go Full Processing Mode and recompress, you will take a quality hit.
How about loading each file in turn, and going to File ->File Information. Then tell us the particulars of each file. VDub does not like VBR mp3, for instance, and may refuse to do Direct Stream Copy.
If this is to be converted to MPEG2, it's not absolutely essential to join the files. They could be converted separately and authored together afterwards.