What is the best squad to have at the end of disc 1 and what levels should they be at

[Masamune·1600]

In terms of characters, it's totally irrelevant. There are ultimately very few differences beween them, in actual battle application, and many of these don't manifest themselves until later in the game. To clarify: weapons, Limit Breaks, minor differences in hard stats, and (based on gender) whether one equips the Escort Guard or the Minerva Band form the entirety of all of variance in the characters (as relates to battle). Thus, the ideal party at any point in the game is the party you wish to use. I would recommend using your three most powerful characters; since materia allows for complete customization, ability sets can be transferred and are therefore meaningless.

Your level really doesn't matter all that much. One can finish the entire game at a lower level; one can also level up to 99 by the end of Disc 1. For your purposes, unless trying to meet some particular standard, just go with what works. If you haven't had any real difficulty yet, you're fine. If you're having trouble, feel free to level up a little more. Ultimately, do whatever gives you the most satisfaction in playing the game.