What is the resolution of your current DVD? If it’s anything but 720×480/576 (NTSC/PAL), then I believe Encore will re-encode (someone correct me if I am wrong). In other words, some DVD Recorders use 704×480, but Encore will re-encode to be 720×480 (I do not know if Encore CS3 does this).
If you find you do have a resolution that forces Encore to always re-encode, you might be better off converting to a more edit-friendly format (dv .avi as you have suggested). Then encoding properly for Encore (try to minimze the number of re-encodes).
Regards,
George