Place the inset picture on a track above the full-screen picture. Open up Pan/Crop on the inset picture. Drag the dashed frame line out larger. This will shrink the relative size of the picture within the frame. Move the dashed frame line around to position the smaller picture where you want it.
Alternatively, if you have Vegas Studio 6, use Track Motion to reduce the size of the track. This works pretty much the same as Pan/Crop, except completely opposite in that you drag the dashed line smaller instead of larger. This also affects everything you have on that track whereas Pan/Crop only affects one event at a time.
Do you mean drag the second picture into the timeline above.
Sorry but I'm having trouble understanding your terminology.
Could you explain it as if you were talking to a beginner.
You place the picture you want on top of the other in the timeline space directly above the one you want as the background. It doesn't matter what the timeline is called (text,overlay ect.) Then you use the motion editor to resize and position the one on the top to place it where you want it on the bottom picture and adjust the size. By deselecting the syncronize button in the motion editor and then moving the time line cursor above the pictures, you will be able to watch what is happening in your preview monitor as you move and resize without creating new key frames.
By the way you can use the key frames to make the top picture move around on the bottom picture or cause it to fade in and fade out for an interesting effect.