casey,
in your first chapter you are talking about blu-ray and in the 2nd you are talking about DVD.
if you are going to create an SD-DVD from your HD-MPEG2 the entire assets will be transcoded again of course.
what encore is doing with your video needs to be set in the transcoding-setting of your project – that´s what you are doing at the very beginning, when you are creating a new project.
3 other points:
– I would never use pro res LT to create an blu-ray out of it and I would never use encore to create SD DVDs
– if I have DVD Studio, as encore has far to much limitations and bugs.
– if you would like to create a blu-ray I would use H264 instead of MPEG2HD, it´s got better picture-quality at lower bitrates.
cheers
danny