The initial problem has to do with the limits of pan crop in non-matching aspect ratios.
[Jiaqi] Also, it seems that following your method means that if I want a PIP in a different location, i have to have the small pic on yet a new timeline. Would that be correct?
Yes, kinda, not a new timeline, it must be on a new track above the video it will appear in.
Jeff
2-Xeon X5680 @ 3.33, EVGA SR-2 Mobo, 48GB DDR3, GTX 580 3072MB, 16TB Attached Storage, Win7, Vegas 11 x64