That’s not a huge shock. This was also a problem when DivX was popular. The AVI container is a really bad match for MPEG-4 era CODECs like MPEG ASP (the basis for the original DivX) and H.264. And it’s worse, yet, for editing. I don’t think the Vegas designers have really even given much consideration to editing MPEG-4 CODECs in AVC wrappers, because, essentially, they don’t exist in common use.
You might be able to get a program like XMedia Recode or Yamb, re-multiplex the AVI into an MP4 wrapper, and try that in Vegas. As others will probably point out, the MPEG-4 specification is a monsterous thing, and it’s not guaranteed that any given MPEG-4 reader will handle any given MPEG-4 file. The MPEG folks are primarily making these technologies for use in other specifications, not directly… thus you have MPEG-2 technologies as a part of DVD and ATSC, MPEG-4 technologies as a part of Blu-ray, etc.
With that said, I’ve never had a problem editing any MP4 files created by Yamb. In fact, I used to have a toy-ish Sanyo camcorder that produced flawed .MP4 files, which, once re-multiplexed in Yamb, worked just dandy in Vegas. BTW, Yamb and XMedia Recode are both freeware.
-Dave