I freely admit that though I have AToW, I haven't actually read through the whole thing. :-[
Good thing you didn't post in the rule question forum! :P
Now, that said, the idea here isn't necessarily to have an actual "create your characters, explore the universe" style game going. Unless there's a massive player outcry to keep the campaign going, this is going to take place in Atreus City, for however long it takes us to get through the action and escape (or die trying). Will that change how the balance is/should be conducted? Should I even make the player characters beforehand?
Ok, let me take a stab again if I understand what you're asking.
Firstly, my recommendation is to have the players create their own characters with the caveat that you have final approval. The first reason is that the character creation process in the ATOW is rather complex and lengthy. It's a lot of bookkeeping that you shouldn't have to shoulder. As it is, you've got to create the NPCs! The second reason is that as awesome as your imagination is, your player group are bound to come up with character concepts and put together characters in ways you hadn't imagined. Your players may use traits or character concepts you may not like at first, but keep and open mind and see if you can work something you hadn't thought of into the campaign. As long as you communicate the premise of the campaign, your player group aren't likely to create any characters that can't tie into the overall campaign. It seems a Maskirovka agent wouldn't fit, and you'd have the right to disallow it in your campaign. Or you could be super ambitious and allow it as a hidden plot thread that there's a spy in your midst!
Secondly, there are two basic formats of RPG campaigns- linear plot driven campaigns and open "sand box" campaigns or a combination of both. As you said, it may not be an explore the Inner Sphere sized sandbox, but an Atreus City sandbox is definitely large enough for an infantry squad. Or, it could simply be a linear campaign- "You receive orders, and your mission is as follows..."
That said, it doesn't necessarily change how you should balance the challenges your characters face. Balancing challenges is a tricky art rather than science. Ultimately you have to create challenges that are difficult enough to keep the characters interested, but not so difficult that it frustrates them. That's why I find it easiest to start small, and add layers to challenges as needed on the fly. The PC squad very quickly annihilates the enemy squad, fine, throw more enemies at them, or a complication- the enemy squad was a suicide unit and they triggered a bomb that will level the city block in x seconds!
Another recommendation is to vary the "flavor" of your challenges. Some examples of challenges an infantry squad could face in an RPG game:
A) An enemy infantry squad (stand up fight)
B) The PC squad needs to take out an enemy 'mech
C) An enemy sniper is somewhere and needs to be located an eliminated
D) The squad is low on supplies and the unit quartermaster is being tight fisted (not a combative challenge)
E) The squad is hidden behind enemy lines surrounded by overwhelming enemy forces- they have to stay hidden and find a way to sneak back to friendly territory
F) The PCs may have performed poorly in a previous game session, and now face a tribunal or possible court martial (not a combative challenge)
G) Squad captures a downed enemy 'mech pilot and need to escort their prisoner back to base
H) [Insert any war movie plot]
And for each of these types of challenges, they can be layered. Encounter A for example is pretty straight forward- throw more enemies at the PCs if needed. For Encounter G, the squad's prisoner either surrenders quietly, or is crafty and keeps trying to escape and cause trouble at every turn. It could also be a morality play as RPGers are often tempted simply to execute their prisoners. As the prisoner becomes more difficult to manage (needing a share of the squad's food and water in addition), the PCs know that he's need for a prisoner exchange so a fellow FWLer out there can be released from an enemy camp.
As you get to know the strengths, weaknesses and capabilities of your PC party, you'll intuitively begin to learn how much they can handle.
Another method of balancing is choosing when and when not to tap into the PC's negative traits. If the characters are too easily overcoming a challenge you throw at them, well it turns out that the one with combat paralysis freezes up all of a sudden, or the character with Beserker rage goes nuts and starts flailing and attacking friend and foe alike. The character with the Unlucky trait rolls too well, spend an "Unlucky point" and make him reroll.