Audio settings for capture
 

I'm going to be using AIW 7500 to capture from LDs. For audio I am going to be running S-PDIF optical tos-link out from the LD player to my Terratec sound card and capture audio stream at 16/44.1 bit for bit accurate without any resampling.

Thus, the audio dialog (see attached file AudioDialog.jpg) should look like this, right?

The image you posted isn't the audio dialog window, it's the a/v sync timing options window. It's correct as far as the 7500 is concerned, but it has nothing to do with audio volume if that's what you're asking. Volume is adjusted with the Windows system volume control in your sound card (the little loudspeaker icon in your taskbar). The audio meter is activated in the "Audio..." -> "Volume meter" menu. It displays at the bottom of the capture window.

The volume meter window shows the lowest volume at the left-hand "-40db" mark. The maximum volume is at the right-hand corner (0 db) mark. Never adjust audio into the right-hand edge area. Most of the time, default audio is in the -30db to -20db area.

Audio is usually captured uncompressed at 16/48KHz, not 44.1Khz. 48KHz is required for DVD and BluRay/AVCHD. You can always resample down to lower Hz if you must, usually for DV or the internet.