Video has been interlaced since it began. It is only with the advent of computers and High Def, that interlacing has become an issue. so yes, it is okay to edit interlaced video.
If your video is to be shown on a normal CRT TV, it will be shown interlaced, even if the source material is not. LCDs and HD TVs are different and may or may not show interlacing.
If you are using progressive and interlaced on the same timeline, I recommend that you keept the output interlaced. Othewise, you have to throw out a lot of the resolution of the interlaced video in order to change it to progressive, whereas, progressive does not suffer resolution wise.
Now when I render to say SD 720x480 for burning to a DVD (TV use), are there any special settings for interlacing that I need to consider? (I have both Movie Studio and Pro)