AVI is the best format to edit in Premiere with. I don't think you can edit MPEG2 in premiere or if so very minimally. If your computer has composite video imputs the best easiest way for you to edit the dvd would be to hook your dvd player directly to your composite connections click movie capture in premiere and record your dvd. Then you will have it in avi format and can easily edit your video without losing quality. Then after editing convert it to mpeg 2 and burn your dvd.
Hope this helps