As a former collegue would say: "Eek!"
Correct me if I'm wrong, but you are placing multiple videos on one timeline, then adding audio to that timeline. That is not a "chapter playlist." It is a single timeline with multiple assets. That can sometimes work, but often causes problems.
As noted above, use a "playlist," not a chapter playlist.
Timeline 1 will have only "Balloons.m2v" and its audio. Timeline 2, Lanterns and its audio.
New -> Playlist. In the playlist, add Timeline 1 and then Timeline 2. Balloons will play, followed by Lanterns.
Now I know from another thread that you want different audio tracks for various conditions. So delete that Playlist. Add a second audio track to Timeline 1. Now create a Playlist. When you add Timeline 1, don't use the pickwhip, use the little arrow and "specify link." Then pick Timeline 1 with Audio Track 2. When doing this, you need to go back and specify Audio Track 1 for the first Playlist.
In the end, you will have a playlist for each combination of video and its audio tracks that you wish. Any particular button on your menus will play a playlist that has the video/audio combination you want.
Playlists do add to the size of a project, but they don't create a whole video for every use.
The audio you show in the screenshot is mp3. There are often problems with mp3's. I would convert them to wav's and let Encore transcode to a3c.
Also, the audio should be exactly the same length as the video for its timeline. The easiest way to deal with this would be to put the audio on the sequence in Premiere. Export the MPEG2-DVD with only your main audio, which will give you the m2v and a wav. Then export audio only for other audio tracks.