Don't mess with the presets. When you do, you tell it to re-encode. At the defaults, it doesn't touch anything compliant.
I don't really recall if I ever let DVDWS encode audio, aside from the menu. I pre-encoded the assets to AC3 if needed, using Besweet, TDA,
SoundForge, and some others. I've not had to author much lately, but if I did, and needed to pre-encode to AC3, I'd use TAudioConverter.
But honestly, there's no real reason to encode to AC3 if source is MP2. DVDWS2 doesn't even give a warning like TDA/TAW does.
Capture settings in MMC look fine.
The mask requires two selections, re-read the guides (can't access an ATI AIW system at the moment).