I have used mpeg-vcr for pretty much all of the video editing, for capturing the video I just copied the vobs to my hard drive and worked from that. The quality it pretty good since I did not have to rencode the video beause it fit on a dvd-r.
For the dvd I am using DVD-lab Pro and Adobe Photoshop.

I did take out a few of the longer inter-cuttings, also lets say that if the obi-wan vs anakin, and yoda vs palpatine fights from ep3 do make the final dvd it will be first the whole duel between obi-wan vs anakin, then the whole duel between yoda vs palpatine. No intermixing the different duels.