I edit on Adobe Premiere Pro 1.5 which will import actual MPEG2 files and allow you to edit them; I rip the DVD files via ULead DVD Workshop2 which muxes them into MPEG2 files. I have exported the edited MPEG2 video in the Premiere timeline as a DV AVI movie file (the default file type for exporting a movie), and the file looks and sounds good.
The only problem occurred when I re-encoded the AVI file for DVD through ULead DVD Workshop2; playback became very stroby. I think I found a clean way around this, but I can't remember right now.
A work-around would be to export your edited MPEG2 timeline to tape and then recapture the video. Not sure if that would be an acceptable loss in digital quality for you. If you find out something else, would you mind posting it here? Best of luck.