Yes, you can mix the footage on the time line.
The best way to keep the quality is to match the size, bitrate etc with the original footage. The templates are usually good enough but you might want to change an interlaced video to a progressive base video which should be fine to do without loosing quality.
You can render from the time line as often as your computer can take, it does not damage the original footage, which is what is being used every time you do a new render. BUT if you alter a video from a blueray format to a DVD format you will then lose quality. You can copy exactly the same footage without altering it as much as you want without quality loss.
1:45 is pushing it a bit to keep the bitrate up and fit it on a 4.7Gb disk.
Did I miss anything.