Mpeg is lossy.  Can we work around this to allow a
    non-lossy image for graphics artists?

You can set JPEG encoding to 100% quality and it isn't lossy. Can the same be done with MPEG* or Theora?

AFAIK if you do not zero the least-significant coefficients (after DCT) the JPEG or MPEG could be loseless. Maybe at mpeg you want to use only I frames, which effectively makes a MJPEG codec..

And if you do the previous, on the next-step (loseless compression - huffman encoding) produces larger output (because of high entropy).

Its questionable why to do it this way, the only reason I can imagine is that you want to decode such a stream by a off-the-shelf / proprietary decoder chip. But watch the bitrate capability of the chips.

If we make both encoder and decoder, I rather won't bother with DCT/IDCT, but directly encode the input or difference from previous frame (this is what vnc and all remote framebuffers do basically - including my idea/design of the Ethernet attached TFT screen).

Daniel
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