Well, I seem to have killed this thread with my technobabble.
So, I'd advise a read of this PDF document...
http://www.izotope.com/products/audio/ozone/OzoneDitheringGuide.pdf
Or, if you invest in a copy of the book 'Using Audition' by Ron Dabbs (recommended), you'll find the pdf on it's examples CD.
Although the document is for the Ozone software, it's examples and text are mostly general. You can download some small(ish) .wavs of some examples, but unless you have very good equipment, you may not hear the low level detail involved.
In addition to the points I made (getting rid of low-level quantise noise with a 1bit signal), it explains very well how dither effectively increases the dynamic range together with the different flavors of noise shaping.
It does not go into what happens when using pre-dithered 16bit material, just reiterates the advise that you shouldn't dither twice.
However, I'll restate a point I tried to make earlier....
Converting the bit depth up from 16bit simply adds zeroed bits to the rightside (least significant) end of the number. The volume with respect to 0dbFS remains the same.
Converting the bit depth down to 16bit simply discards (truncates) the rightside (least significant) bits, the volume remains the same - and THEN you add dither.
Dither has nothing to do with sample-rate conversion - it is entirely aimed at masking the quantise noise of the lowest bit when the bit depth is truncated.
If you own a soundcard that only actually works at 48Khz such as a Creative Live! or Audigy - either get rid of it or stop worrying. Is there any reason to persevere with these things now that
the E-mu 0404 is so cheap? Sorry Creative owners, but even torture won't change my mind on that issue.
So, it depends on what your edit processing did (eq, compression etc) what happens to the dither, bearing in mind it could have been "noise shaped" and predominate only in certain frequency bands. Have a look at a fade out of one of the CD tracks using the Frequency analyser - if the noise floor tips up at the HF end, it's probably shaped dither.
As to the question "is it worth working at 32bit float with 16bit in and 16bit out?" - I say YES. You are always going to throw bits (= quality) when editing. A higher editing resolution will definately limit the damage.
However, if all you're doing is sequencing CD audio for compilation purposes (there is no EQing, normalising or the like) and the only mixing is during crossfades, you might just as well stay in 16bit all the way, turn dither off and thus preserve everything 1to1.
If your material came from commercial CD, be assured they ARE dithered. Either it's an early digitisation from analog tape, where the A/D converter provided the dither; or with recent digital productions, it was a higher bit depth and dither was added last of all at the mastering stage. Pro Tools can't do better than 24bit integers, so with 32bit floats to work with, what worries have you got?
And don't forget, Dither adds signal. So ensure there is headroom in the file for it, that is, NEVER normalise to 0dbFS, -1db will do the trick and nobody will notice as the dither will raise it a bit. If you dither a 0dbFS file, you will (must!) cause some clipping.
You'll be pleased to know I have no more to say. I'm sorry it's technical, but - this is a technical business.
Cheers