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Well, vegas 5 should support mpeg 1&2, but you could try to upgrade to either Vegas 6 or Vegas+DVD (You can find a comparison between Vegas 5, Vegas 6 and Vegas+DVD) here. )

If not, reffer to your vegas 5 help file or find the supported format info on the net (google) and then use google again to find a mpeg-to-supportedformat converter. Once converted (don't forget to keep a copy of the original for backup) you should find no trouble in editing the video file. Keep us informed with your progress.
 
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