Pardon my ignorance, but I have to ask this question. I used Vegas 6.0b to convert some m2t footage to cinform avi. I played back that avi on Windows Media Player and it looked razor sharp and close to full frame rate (only a 2.4 800mhz CPU, so probably around 15-20fps at least).

When I import that file into a 1080i project in Vegas and preview in best quality auto sizing, the picture quality seems drastically lower than WMP and frame rate is kicking in at around 10-12fps.

Any reason for the better quality preview in WMP?

In Vegas on you PC is may on be decode to a lower res/rate to maintain a workable editing speed, however the full quality of your final output is not lost. Also the scaling to project window is not as good as the hardware accelerated scaling in Windows Media Player (so the output of WMP can look better then Vegas previews.) In Media Player we can decoder much faster as that as a YUV output, whereas Vegas is RGB. As 99% of compressed Video (M2T, DV, CineForm) is YUV based so there is a small-ish decoding plently (that explains the speed difference.) No of this impact the final output quality from Vegas.

Thanks David for the concise answer. Does Premiere's preview handle it better?

In Premiere the Aspect HD preview is YUV and uses the graphics card for scaling just like Media Player. So it looks pretty nice.