If you are going to use WMM2 for editing, you would be better initially to have converted your VOB file to MPEG2 not MPEG1 as MPEG1 will only give a small VCD size picture in the 300 X 200 regions, not a 720 X 480 DVD NTSC size you need for full screen DVD.
Will t@b converter let you convert your Vob file to MPEG2 ? If not the VOB2MPG free converter link I sent will do that, the Mpeg2 file output will be the same size as the Vob input, you will need Net Framework 2 for Vob2Mpg, I think the link explains that.
After editing I think the best output from WMM2 would be to save a file as high quality video NTSC, it will be a Windows Media Video format file at just over 5,000 kbps, which will be a bit lower in quality than the input from your MPEG2 file, at least you can play both files later and see if the difference is acceptable.
Incidently if WMM2 doesn't create clips before editing you can make your own by splitting the movie at any point, the left hand silver button under the preview window will split the clip that's highlighted in the storyboard window, bottom of screen, easy enough to split a few times, then right click, delete what's not wanted in between.
Your Video-DVD burning software should convert from WMV to DVD as part of the making DVD process, my Nero Vision Express burning software does that automatically.
I have just converted a Vob file to Mpeg2 using Vob2Mpg, then opened that Mpeg2 in WMM2 then saved after editing, 3. Finish Movie, Save to My computer, Other Settings, as high quality video PAL,not NTSC (I'm in the UK ), then in my Nero Vision Express I've burnt as DVD.
Obviously this initial converting from Vob to Mpeg2 would be avoided if you could find a suitable video editing program to accept Vob in the first place, as would the saving as a WMV file of a slightly reduced quality in WMM2 after editing.
You mentioned extracting about ten minutes from 3 hours worth of DVD material, I think if you only have 10 Gb of hard drive free you are going to have to just work with one Vob file at a time from your Video_TS folder, convert to Mpeg2, edit the Mpeg2 then save as a file on your hard drive as high quality video in WMM2, then delete the Mpeg2 conversion, then keep doing this through the other Vob files, finally joining together all your saved work files in WMM2, making one final file and with your DVD burning software, burning as a DVD Video disc, 3 hours worth of DVD would fill your hard drive otherwise.
As a matter of routine I'd delete any progs I didn't need or use any more, do a disc clean up to remove temp files, temp internet files etc, stop unnecessary programs running at startup, schedule a scan disc at boot time, then do a defrag and every time I save a file from WMM2 I'd do a defrag again, I always defrag after rendering a video file, reboot and then burn and when working with video switch the modem and anti-virus off.
Hope any of this helps, Les.