I have a cam (Pan SDR-h200) that creates MPEG-2 files that are AC-3 encoded (.MOD ext, but can rename to MPG). Will the latest ver of Vegas decode the AC-3 audio. I know V5,6 won't. Have no problem upgrading if it will, but need to know for sure.
In your case... probably not. Sometimes you can sneak a mpg in and Vegas will accept it and display the AC3... but you're already renaming it from one thing to another.
In most cases Vegas will only accept AC3 if it comes within a VOB, TS, M2TS, or MTS
Your best bet would be to demux in a separate app, then take the AC3 and create a fake VOB file. You do this by importing the AC3 to DVDa (you don't even need a video file) and create a disk to file... then import the VOB to Vegas.
What Tom says is true for reading AC-3 audio files (i.e., where there is no video present). However, Vegas -- including Vegas 7 -- can and does read video files that have AC-3 audio. Just put a VOB file from a DVD into Vegas, and it plays just fine.
If you really need to play just an AC-3 audio file on the Vegas timeline, I provide a trick a year ago that uses DVD Architect to quickly attach the AC-3 audio to some static video so that Vegas can read and play the audio.