Where did you get this avi? Did it work before? Avi is a 'container'. A codec was used to create it, and that codec is not on your pc, so vegas cannot open it.
I got the AVI from converting dvr-ms to it using Any Vid Converter. I then intalled the codec for xvid that windows said I needed to play it. It then played in Windows Media Player, but again no vid in VMS.