Solved! Go to Solution.
Do you have a selection?
Are all the files in the same coordinate system? (preferably a projected one)
See the discussion in the help files
http://help.arcgis.com/en/arcgisdesktop/10.0/help/index.html#//00080000001q000000
try running it on a local machine with files in a folder in a new project
try running it on a local machine with files in a folder in a new project