I have been trying to edit a mesh through the usual means of exporting a base-game dress through TSRW and then importing it into milkshape.

I know how to edit the mesh (move things around etc.) - but the bodymorphs are confusing me.

Problem 1) At first I was deleting vertices willy nilly and moving things around (I deleted the bodymorph arms because they were getting in the way). Then I loaded it up into TSRW and... disaster. Whilst the dress was now the right shape - the sim model was now missing all of the sections I had deleted; her arms, neck etc.

I have tried to edit the dress without deleting sections of the body, but it's absolutely impossible to see what I'm actually clicking on/moving and when I do move vertices around it leaves black gaps underneath. For example; I wanted to make a bustline wider and where I had moved the vertices further apart there was a black space.

Problem 2) At the moment I have been deleting all of the other bodymorph groups and editing only the basegroup (I'm under the assumption that I can use the meshtool kit to generate the bodymorphs once I'm finished with the dress) - is this correct?

Well, it stands to reason that the parts you delete...don't show up anymore.

1) If you're working with Milkshape, Ctrl-H to hide groups, Ctrl-Shift-H to unhide them (or use the buttons in the UI menu on the side in the Groups panel).
Same goes for hiding only parts of a model; the vertices will still be visible (colored a darker gray), but you won't select them by accident.
The only problem with this is that if you have only group_base visible (the other morphs/groups are hidden) and you want to unhide a part of group_base that you previously hid, the hidden morphs/groups will also become visible/editable again. A solution is splitting your .ms3d file into two projects — one with the base group, another with the morphs — and merging them when you're done editing group_base (using Milkshape's File \ Merge... command).

2) Yes, you can use the Mesh Toolkit to auto-generate morphs — which will require reimporting into Milkshape and fine-tuning afterwards (in my experience, auto-generated morphs are never perfect). It reduces your workload substantially to use reference meshes as close as possible to the mesh you want to generate morphs on.