It is possible to edit your movies without converting to .wmv. It takes a program capable of editing mpeg2, and there aren’t too many of those. None of the good ones are free. Womble Mpeg Video Wizard DVD is one to consider.
Since your copy of the movie is now an ISO, not files, either rip again from the disk to the hard drive as files or mount the ISO you have now in a virtual drive so that the Womble program can work with it. Daemon Tools is a free, commonly used virtual drive.
Two other possibilities for an mpeg2 editor would be VideoReDo TV Suite or VideoReDo Plus. AviDemux is supposed to be able to edit mpeg files, but I’m not sure I would trust it to keep audio/video sync very well. If you want to try it, it is free to download and use.
If you are determined to convert and edit, I would choose to go to avi personally. There are plenty of free avi editors to choose from like AVIDemux or Virtualdub. You can convert the ISO to divx or xvid avi using FairUse Wizard, which is free and can work from an image file.
http://mirror.brokenlogic.net/fu2.6-setup.exe This is the celtic-druid version which has no restrictions on file size.