I'm working on a project right now creating a DVD from camcorder DVDs that a client gave me. It's really an awful way to shoot if you're planning to do any editing, but he didn't know that and he needs the footage anyway, so I just have to deal with it.
I used MPEG Streamclip to transcode the VOB files to .dv files, then brought those into Final Cut Pro. FCP can't natively edit MPEG2 video, so you do have to transcode it first. Anyway, MPEG Streamclip worked well, and while I don't have the DVD done yet, the footage doesn't look too bad in FCP. However, no matter what you do, you are going to get artifacting because the process of going from compressed material to uncompressed material back to compressed material causes a (significant) quality loss. Unfortunately, MPEG2's structure and especially the multiplexed data streams on a DVD are by their nature difficult to digitally manipulate without a conversion to some other format.