There is something going on somewhere. I wish I had some ideas for you. Dale recently had a freaky situation where another software program interfered with Vegas, I believe, which he discovered by accident.

You shouldn't be having this problem, but yet you are. Maybe someone will pop in with a solution.

Thanks Jeff for your help, I am burning 5min of the WMV file to a DVD so I can see what it looks like on TV if it has any interlacing problem that can be seen.
WMV was the best result so far !!!!!

I burned a 5min DVD of the WMV it looks ok, but not that good, it still has some distortion when there are motion in the footage.
At this point I don't know what other options I have, been up all night trying all different combination and still have no luck, I need to finish this project within few days !!

Because you are downscaling from HD to SD with interlaced material you need to specify a de-interlace method in your project properties. This will not make the output de-interlaced but I suspect it will prevent the interlace artifacts that you are seeing.
In general best results come from setting the de-interlace method to Blend.

Bob, I do have the properties setting in the project to "Blend Fields" in the Deinterlace method.
I have done downscaling from HD to SD many times but never have that interlace artifacts before that is so visible.

You might take some old HD footage from an old project and render some of that. If that has the same issue where in the past you didn't have the issue, then you might reformat your hard drive and reinstall everything.

If your old footage doensn't have issues, than the footage from your current project may need to be re-captured.

Try to recreate the conditions of the past where things worked. What is difference this time? Are you working off a different hard drive? Capturing to a different HD?

Recreate the past conditions, or at least go through a mental checklist as to what is different now. Do you have new software installed? Decoding software?

Interesting then. Are these interlacing artifacts only one scan line high or bigger?

Reason I ask if if they are one scan line high then they are just genuine interlace artifacts. If they're bigger then they're the result of some interlace aliasing during scaling.
Can you post a frame grab so we can see exactly what we're trying to deal with?

One other question, are you by any chance doing any nesting?
Final question, what are you viewing this on?

Jeff, the footage in the past is the same, HD-60i even the cameras are the same.
The only difference I see now is that I went from XP to Vista and no other software installed, when I run Vegas nothing run with it anyway.

Bob, The interlace artiffacts are only with motion, when the person is not moving the picture looks good, only when they move I get the interlace artiffacts in their arms,legs...
the footage is not scaled any biger, no changes has been done to the footage in post.
I do not use any nesting, and I view this on my computer monitor and I burned 10-15 DVDs as a test and view them on LCD TV.

I will post some footage tonight, I am trying to render it with WMV file with a higher bit rate and see if it makes it better, it is taking a LONG time.

Thanks for all your input :)

Agreed, you can easily put 2 hours on an SD DVD with no problems.

Well, I did not have time to play around to fix this problem, the project had to be done within few days of the shoot, so I reformat my drive and reinstall Vegas only and I rendered the project with no problem. It was too many combination and changes that I have made on my computer and restart fom the begining was the fast choice for me.

And here are the highlights of the shoot:Fashion Show 2009 on Vimeo

Thanks for all your help !!!!!