Does Vegas allow for vhs to digital conversion? I want to convert old vhs tapes to dvd and Dazzle converter has been recommended. However, it comes with Pinnacle for the editing, which obviously I don't need with VMS. Any suggestions on how I might do this using VMS?
Dazzle is a very bad choice. Most any device that converts to MPEG is a very bad choice.
If you want decent transfers look for a device that encodes to DV. Canopus makes a line of different devices, some stand-alone boxes and some cards that install in the computer. The ideal unit is the ADVC-300 which includes a time base corrector that helps restore stability to old icky VHS tapes. It's a tad expensive at around $400+. The model 110 is quite a bit cheaper but doesn't include the time base corrector.
Quite a few Digital 8 and MiniDV camcorders will handle the conversion too. Some will do it on the fly; any analog signal coming in gets converted and piped out the firewire port in real time. Some require recording to tape first, then playing it back. You can find old used camcorders to do this on ebay sometimes very cheap.
In all these cases Vegas itself has nothing to do with the conversion. The device you use does the conversion to DV. Vegas' VidCap program will capture an AVI file through firewire just the same as if you were capturing a MiniDV tape.