M2 is basically C2 with Z32 head, which is larger so that it can provide for better "shock absorption"--recoil from weapons fire, drops, etc. It was a big deal when the incan bulbs were the dominant king, since they will burn out when subjected to physical shocks. The shock absorption is provided by empty spaces between the drop-in and the head. The empty space, however, makes it rather not very suitable for use with LED drop-ins, which can take much more physical abuse at the cost of potentially overheating.
My advice? Get the C2. C2 comes with Z44 head, which is smaller and will provide a much tighter fit with drop-ins. If you are thinking about running high powered drop-ins, get the Z44 Cryos cooling head.
If you still want to go for M2, just do what ElectronGuru mentioned. You can also take a look at the Z32 Cryos head, which will significantly improve the heat dissipation compared to the stock Z32 head.
As for the LED drop-in, nothing compares to Malkoff M60/M61 series when it comes to reliability. They aren't the brightest, but you'd have to work pretty damned hard to make it not work. They come in a variety of flavors, from TIR M60, to floody M60F, to high CRI M61-219, to marathon running M61LLL, to blinding M61SHO. The downside is that they are single mode only.
If even higher output is desired, you might want to turn to the P60 modders here on CPF. nailbender and vinhnguyen54 can make you ridiculously high-powered drop-ins at affordable prices. In fact, I'm about to get the copper-mounted XM-L2 U2 drop-in and driven at 4.2A, made by vinh. That sucker should do anywhere from 1,100 to 1,300 lumens. If you have the money to burn, you can also go with triple/quad emitter drop-ins from TorchLab, kerberos or VanIsleDSM, which will get you anywhere from 1,200 to 2,000 lumens. Keep in mind that, if you do wish to go with the extreme output options, you will need additional modifications to your flashlight, like using the cooling head mentioned above, replacing the switch to something that can handle higher current flow, as well as forfeiting the usage of primary CR123A cells and sticking to high capacity rechargeable cells.
If you want multi-mode drop-ins, you have a lot of off-the-shelf options there, as well. However, using multi-mode P60 drop-ins will rid of the "tactical" UI of the flashlight, since you will no longer have a consistent interface as you will need to use the switch for both activating the light and cycling modes. There are many options for this, however, and Solarforce, Dereelight and ThruNite offer a variety of drop-ins that will suit your need. If you need something more "exotic", you can also ask the CPF modders, as well.
If reliability is paramount and that you choose to go with a Malkoff, there is a way for you to obtain multiple modes. That will require patience, but it's not impossible. A few years back, McGizmo produced a type of custom switch named McE2S, each of which came with different resistors--15, 30 and 60 ohm--so that they will act as two-stage LOTC like the ones used in Surefire's A2 Aviator and LX2 Lumamax. You can modify the McE2S to create the McC2S using the stock Z41 tailcap. I'm actually running this setup for my C2, and it's nothing short of awesome. Press the switch lightly for low output, put a death grip on it for high. It doesn't get any better than that. The problem is, McE2S is no longer manufactured and sold, so you will need to find someone who's willing to part with one to get it. It didn't take me too long to find one after I posted a WTB on this board, so you'll be able to do it.
As for waterproofing, I wouldn't worry too much about it. Even with the stock Z44 tailcap, it takes a lot of effort to get water inside since the o-ring located at the tail is so beefy. If you are still worried, you can swap out the guts and install a McClicky inside, which will let you tighten the tailcap all the way down without activating the light, but you will lose the lockout function, as well as the ability to install McE2S for multi-mode operation for single-mode drop-ins.
Here's a picture of my customized C2, modified to handle single-mode, high output drop-ins for extended periods with multi-mode function. If you choose either the M2 or C2 and attach the Cryos head, it will turn out roughly like this.
Think of this as LX2 Lumamax, just slightly fatter and with 6 times the output.
In the end, it all comes down to your choice. That's the beauty of P60 setup.
