Welcome to the forums Delawaredave.
It depends entirely on how elaborate you want to get with your editing. Simple cuts and joins are not difficult, but if you want to put in transitions, you'll need a dedicated editing program.
There are some programs mentioned in this thread which will do simple cuts and joins: http://club.cdfreaks.com/f34/simple-mpeg2-editing-program-272668/
The TMPGenc program listed at the end will probably do transitions as well. I know that Womble makes some dvd editing programs that are designed to work with mpeg2, and there are more mainstream programs like Adobe Premiere Elements and Sony Vegas Platinum that can do this.
Any program that can make cuts outside of the I frames will have to be able to do a minimal amount of re-encoding to the video. The Womble and VideoReDo programs can do this I know, as can the other commercial programs. The free ones mentioned in that thread probably don't do frame accurate cuts, and just go to the nearest I frame.
And to answer your question about .vob files, yes, they are a special form of mpeg2, made to the specifications necessary for dvd-video. When I edit a dvd, I first use a program called Vob2Mpg to combine all the vobs of the movie to one mpeg file. This process does not reencode and does not affect the quality of the video. Vob2Mpg is free to download and use.
If you are using a dedicated editing program, it should be able to output as a finished dvd, ready to burn. If you are just using one of the mpeg2 cutting programs, you'll need an authoring program to set your chapter points and make your dvd. You can use a free authoring program like GUIforDVDAuthor, or DVDAuthorGUI or DVDStyler for this. Authoring will not degrade the video either.