Dan,
There is a common misperception that AC3 or dolby digital only refers to surround sound. That is not the case. AC3 files can be anything from mono to full surround. What Encore is doing to your stereo file is converting it to a stereo AC3 file. This is normally what you want, since an uncompressed PCM file (which is legal by the DVD specs, btw), takes up a bunch of space and may cause playback issues on some systems.
FWIW, I usually name my AC3 files so that I can tell instantly how many tracks there are. For instance for a stereo file I would name it audiofile 2.0.ac3. For surround, audiofile 5.1.ac3. And so on.
For more information, check out dolby’s web site at http://www.dolby.com.
Hope this helps. Have fun!
Rob