Extracting DVDs to a DV timeline is adding an unnecessary stage of compression. Simply extract the DVD material using a professional tool such as DVDxDVPro to an uncompressed Quicktime file and import it into an uncompressed FCP project. Export the end result back to MPEG2 and author a new DVD.
There’s no need to even use the DV codec at all. You won’t improve the extracted MPEG-2 footage any, but you also won’t be adding unnecessary DV compression to the extracted material before you have to recompress it to MPEG-2. Any titles/dissolves/color correction that you do to the material in your edit will benefit from not being DV-compressed before being ultimately compressed to MPEG-2.
As to why Final Cut Pro doesn’t import DVDs, there are many reasons. As has been stated already, MPEG-2 is a highly compressed delivery format, not an archiving or mastering format. Final Cut Pro is just that – Pro meaning Professional. Using MPEG-2 material from DVDs is a worst-case scenario, and hardly desirable.
Obviously you have to work with what you’re given, and if a client only has a DVD, then you’re forced to deal with it. However, to fault Final Cut Pro for not having DVD extraction built-in is a bit naive. Other professional editing applications don’t have this feature, nor is there a huge outcry for it from the professional user base. Final Cut Pro doesn’t support WMV files or muxed MPEG-4 files either. It’s not a shortcoming of the application, it’s that some people have expectations that are beyond the scope of use for which the application was designed.
With regard to archiving formats, anyone wishing to archive video material should use the highest quality format available. If the material was shot on DV, then DVCAM tapes would suffice. If the material originated on film or Digital Betacam, then D1 or DigiBeta would be the most desirable option as far as tape formats. Another solution would be to save the original footage to a hard drive. The basic rule is to avoid any further compression or generation loss at all costs.