Correct. If you transcode as mpeg-2 (.m2v) 720×480, 29.97 fps, then you can tell Encore to not re-transcode it. Otherwise you will be forced to when you build the final disc. The only option you have is changing the bitrate, which affects the quality. Also, the audio can be either WAV/AIF or AC3 which will save file size. Usually people will use 8mb/s video and 192K/s AC3 audio.
By transcoding it before you use it in Encore, you save time when you build the final disc, and have a little more control over the quality.