Nope, iPods don't seem to like gapless playback from one track to another. Drives me up the wall, personally.
We talked about it some in
this thread. Someone presented a method to put audiobook bookmarks into a single MP3 file so that you could at least go from sub-track to sub-track within the MP3 file, but I haven't tried it out yet.
Oh, wait -- you have two tracks playing at the same time. That's a little different, as the iPod probably only has enough horsepower to play back one MP3 stream at a time. All the heavy lifting for the audio and video is done by dedicated hardware chips, and I imagine they didn't account for decoding more than one audio stream.