the game is that, but sony Vegas saves it like crap..
No, are you using Fraps, THAT is the problem!
Sony Vegas is not doing anything wrong, it does what it says to do... the problem is, the video itself is not widescreen/HD. So yourself need to make it in widescreen.
You need to upscale your video parts inside Sony Vegas. It's difficault to explain that on text. GTAMissions had a great post on his forums how to do it, but I can't find it anymore. (got banned

)
Anyway, I might make a tutorial about it soon. Tell me if you want it.