After a lot of messing with transcode and ffmpeg, I have found a suitable solution. I am now unsing lives and qdvdauthor. Everything seems to work well. I am not sure exactly what lives is doing to get the files into an editable format or how much loss of quality happens, but the edited video looks good.
It takes a very long time to open vob files. I assume this is because lives is transcoding the clip into some other format. It would probably be faster on a newer computer (my CPU is 650MHz). Also takes a long time to save the finished video. But then even if I was using something other than lives, I would have to transcode.
Still wish I would have bought a DV camera. Maybe next time.