With Vegas, what is the proper/best project size when capturing and editing HD footage ( I am using from the HC1 via Firewire) and will be editing the m2t footage.

If you are editing in HDV with Vegas 7.0, select for your project properties:

HDV 1080-60i (1440x1080, 29.970 fps)

Capture will be throught he internal capture device.

Do most people just editing the m2t files? What is the benefit or disadvantage of the m2t?

I edit the m2t files. I just capture, edit, do some compositing here and there (not heavy comping, mind you, that's for AE!) and then render out as 720p. Looks beautiful.

SB