When he rendered the MPEG2 file in Vegas, it had to decompress and recompress EVERY frame. With DV-AVI it does not have to do that – It just copies any unchanged frames. With a compressed format such as MPEG2, even if the settings are exactly the same, it has to totally render everything.
Yes, he is losing some quality. Maybe not enough to notice in one render (depending on the initial quality) but he is definitely losing quality. For the best quality, record as DV-AVI and then edit and render as MPEG2 for the final output.
Edward Troxel
