Here's another update. I finally gat a reponse from Sony after I told them how I got the app running. It turns out my son did need to use AVI files. The "fix" allow Vegas to run, but the AVI files would only come in as audio, so I was hoping Sony would be able to help. Well, long story short is they said in order to use AVI files with Vegas you need to purchase a 3rd party codec. They provided the following info:
-----------------------------
In order to view the avi file in Vegas you have to install third party software. Here are the links for the Third party codec.
http://www.morgan-multimedia.com/
http://www.pegasusimaging.com/index.htm
------------------------------
Well after trying several other freeware codecs (unsuccessfully) I finally tried the 60 trial at the morgan link above and it seems to work great (although I'm not thrilled about spending another $20 or so for functionality that seems should have been in the app to begin with). Althougth it is a codec for AVI files, it is the MPG codec.
Hope this helps.