Nested within nested, ouch.

At any rate, you should be fine using either method you described. Try the first one and see how it looks.

Agreeing with Jeff that this is a reasonable approach.

There's always someone to say "best quality is uncompressed", but in the real world, DV has been tested through multiple generations for image degradation. It's good for somewhere between 10 and 13 generations without visible loss.

So, yes, DV is quite a reasonable DI for a standard def workflow.

Appreciated this is a little away from the original topic, but fwiw I tend to create rendered sub-segments that I then stitch together in a master veg. Then I use the REPLACE function in the media pool whenever I make any changes to the segments. That maintains the integrity of each segment's position. Occasionally that makes project-wide colour correcting a tad harder but it's not a major showstopper.

I have (and still do) worked with nested veg's and I have (and still do) used the method Jeff describes above, but this way usually works best for me personally - as I get older I prefer simple timelines!

More to the point, some of my projects contain ridiculously complex sections that would drag Vegas to its knees if I was to try and do it all on one timeline (using chroma keying, 3d alpha tracks, gaussian blur, bump map lighting effects, you name it).

Nesting veggies
 

I've found a very good reason for using nested veggies:

Although I'm primarily working in V9.0c now, sometimes, it's nice to be able to do sub-projects in V8.0c in order to use 32bit plugins, and nest those in the V9 project - thus retaining full editability of the sub-project within V8. (If you import a V8 veggie into V9 it will convert it to V9 - whereas, if you nest it, you retain the ability to edit it in V8).