Gary, definitely change your procedure to using DV-AVI as the intermediate renders. Then you can start your final project and add these DV-AVI files to the timeline and render THAT to MPEG2.
Recompressing MPEG2 is NOT a good formula for quality.
Definitely no need to purchase Excalibur just for doing this one time. However, if you had a BUNCH of them to do and/or you needed some of the other tools, it would make sense. Just pointing out that if you had Excalibur 4 there’s a tool built-in that will do this for you.
Vegas Movie Studio is like the little brother to Vegas+DVD. As you have seen, Vegas Movie Studio 4 is NOT the same as Vegas 4. It is also much more limited in functionality (i.e. unlimited audio and video tracks in Vegas vs limited tracks in Movie Studio, scripting, etc…)
When you extract, it simply copies the files into the folder you specify. You then just browse to that folder using the Explorer window and then drag the desired song to the timeline.
First of all, assuming the PNG sequence has the alpha channel, use that. After loading the sequence, right-click it, choose Properties, and pick the proper alpha channel mode.