You have to export the timeline first as a file then reimport it into Encore. I believe the best method is to export an AVI and then import that file into Encore. It would be great if in a future version you could open a APP timeline in Encore, but that is wishful thinking.
Just export as an uncompressed AVI... Encore is going to have to transcode the file into a MPEG2 and you will see quality loss at that stage. That is just the nature of putting a file onto a DVD but besides that you should be fine with making an uncompressed AVI.
Encore does a good job of encoding the .avi file to mpeg, i have never noticed any qaulity loss in the finished file, having said that , if you have a longish video then you will start to notice some quality loss as Encore has to fit the video onto a single DVD (not unless you are using dual layer discs)