Would I 1.) take say... Connect HD .avi files and run them through DV FilmMaker before editing in Vegas 7 or 2.) edit the Connect HD .avi files in Vegas, export again (with what type of file?) and then run them through DV FilmMaker for the final output?

Before before before! Option 1! Converting to 24p afterwards tends to blend together your cuts, makes things look weird. Before gives you the freedom of editing true 24p and makes special effects compositing easier too. It's a lot more to convert, I know, but trust me.

I converted 12 tapes of footage from 60i to 24p for Lifeguard. Captured with Cineform to their .avi, then pulled it through DVFilm back out to Cineform. Now I'm editing in AspectHD with Ppro 1.5. Works like a charm. Conversion took me about a week.

Wouldn't you have blended footage (60i to 24p that strobes a bit) with pure unblended visual computer graphic effects. Doesn't that look weird?