We have been using a similar technique for a while in a system we developed that we have nicknamed 'blackmagic' that uses Shake and a bunch of custom scripts to allow the combining of multiple sources to get the best out of it.
Basically we are taking in the various telecines (i.e. the various laserdisc releases), do a quick transform to get the corners roughly aligned and then doing a stabilisation pass to try to remove as much gate movement etc. as possible (this simplifies the next steps enourmously).
We then pick one transfer to be the reference master and, using the tracker, pick suitable track points in each transfer. Once a solid tracking solution is found, we then feed the trackpoint data to the warp (morph) function to get the picture elements to align within frame as close as possible.
Then stealing an idea from the astronomy boys, try to treat it as a multipass capture of the same source (which it basically is) and create a composite image throwing away noise and gathering detail to get a final result that is a lot cleaner and more detailed than any of the individual laserdisc transfers are on their own.
I've been writing up the process and sent a draft of it to Zion a couple of weeks ago for him to turn into one of his slick looking webdocs for the X0 site, so it is great to see someone else looking at a similar process using different software.
We had been discussing wether using free/cheaper programs the same thing could be achieved (although Shake recently became a lot cheaper anyway).
You should be able to achieve the same thing in Digital Fusion, but I haven't played with Fusion for years, so I'm not sure how much control you get with its tracker and warp tools (does RE:Flex run on fusion?)
I remember back in the mid 90s when one of the guys that wrote fusion was demoing a beta of V1 at a little trade show. I watched him run it through its paces and the damn thing was so *fast* for the time. I went up to him and commented that "now that is why people spend so much on SG workstations" he lifted the tablecloth and showed me the standard PC it was running on (it was a 486 DX4-100 or a Pentium 60, I can't remember which) and I was literally standing there with my mouth open.
It was the first time I thought PCs might actually be able to be a real force in post. It still astounds me how fast they came on. In 95 if you had said to me that 10 years later people would be able to re-edit and add effects to feature films in their bedrooms on their home PC's and see most of the results in *real time* I would have laughed out loud. If you had said they could then put it out to a DVD atthe same quality that the studios get I would have thought you were truly crazy. It has been an amazing transformation for just a decade.