Hey Gene,
I do my sanding and first wipedown in the basement workroom with exposed joist ceiling. Final wipedown and varnishing is done in a separate room with a drop ceiling - vinyl faced fiberglass ceiling tiles.
I like 220 wet sanding between coats, using a backer block on flat surfaces. Raises no dust, and the remaining shiny areas show you where you're not quite there yet. For my interior varnish work, I got tired of trying to fill the grain with varnish and have gone with a precoat/sealer of epoxy (thinned with stove alcohol). Once the epoxy is smooth and flat, then I'll start with a few coats of varnish for looks.