Did you have both files highlighted/selected before clicking the Merge button?
Yes, Export will create a single mpeg file. After clicking the Export button on the Edit window, select Custom as the export template from the dropdown menu and then select either mpeg1, mpeg2, or AVI as the file type.
The only time I've ever seen it greyed out is when only one title is selected. Maybe try doing a fresh install. Uninstall the old Nero and run the Nero 7 Clean Tool and then reinstall Nero 7. Probably the best version is 7.5.9.0.
