Ok, so in order to get Video in from my VCR I've add to do the following...
1. Setup MCE to record from the composite video 2 - not as easy at is sounds but possible. I had to call tech support and then figure it out by myslef when they couldn't help. Basically you have to use the setup wizard to pretend you're adding a sat reciever even if you don't have one and pretend that it is coming in on the composite video 2 input
2. Record from the VCR as if I were recording a live TV signal (manual record) and save the file in the native MCE file format MS-DVR
3. Use the DVGate software that come with my Sony to read in the MS-DVR format and then safe it as MPEG2 (see below)
4. Use MM2 to read in the MPEG file for editing
Below are the instructions for DVGate that came from Sony...
The follow this procedure to convert DVR-MS video format to a different format in the Microsoft(r) Windows(r) XP Media Center Edition operating system
Click the Start button, point to All Programs, point to DVgate Plus, and click DVgate Plus.
In the Mode Select Guide window, click the Next button. NOTE: If the Mode Select Guide window does not appear, on the menu bar, click Settings, and then click Start Mode Select Guide
In the Mode Select Guide - What would you like to do? window, click to select Edit clips (movie and still images) then output them to various file formats.
Click the Next button.
In the Mode Select Guide - to edit and output clips to various file formats, click Done window, click the Done button.
In the DVgate Plus window, on the menu bar, click File.
On the File menu, click Add video recorded with Media Center.
In the Add Video Recorded with Media Center window, under video list, click to select the video file to be converted.
Click the OK button.
In the DVgate Plus window, under clip list, click to select the video file to be converted.
Click the Output button.
In the Confirm File Output window, click the Change box.
In the File Output Settings window, in the save format box, click the down arrow and the click to select the video format.
Click the OK button.
In the Confirm File Output window, click the OK button