Ulead movieFactory 5/6 + is not free but at £29 you get a lot of software for your money
Nero Vision 4/5 ( From Nero 7 and 8) is also able to do what you wish
You shouldn't need anything to "capture" as it is a matter of copying the files off a finalised DVD disc, ( Usually the VOB files) in the Video-TS folder ( there are some variants)
While editing mpeg and then getting back to DVD may be possible with freeware I feel you would need more than one and Im sure the cost of learning them and figuring out how to make it all gel might make purchased software seem cheaper

Try
Virtual dub Mpeg2 to see how much it can do for you