Or, for free (is it a coincidence that new newcomers seem to push commercial software?), you can use Audacity
with the LAME MP3 encoder add-on. I can encode MP3 files at up to 320Kbps with Audacity/LAME.
VirtualDub uses the already provided MP3 support in Windows, and thus is limited to the commercial MP3 software you already have installed. This is from the VirtualDub website:How come VirtualDub doesn't let me compress into MPEG layer III audio, or only up to 56Kbps?
Audio compression is handled by third-party Windows ACM drivers, not by VirtualDub itself. The MP3 compression driver comes from Fraunhofer-IIS and has a few incarnations, with the filenames L3CODECX.ACM, L3CODECA.ACM, and L3CODECP.ACM. If you don't have any MP3 options, you either don't have the L3 codec installed at all, or have the standard version (L3CODECX). A 56Kbps limit means you have the Advanced version; 128Kbps means you have Professional; 320Kbps means you're using the warez Radium hack.