Update on this.....
I joined GACs last night, this morning I spent time prior to the setup phase upgrading my ships and working on mods. Those ships and changes are reflected in my "locked roster" in the setup phase. So again, this is scenario 2. The game is taking a snapshot of your roster once you join to save time at the time of lock. Lock is when your roster is actually locked.
I just updated gear levels and mods, these are not reflected in my GAC roster. So again, it is not locked when you join, but when the event actually starts.
2nd matchup of GACs and I can verify it did lock when I joined. The upgrades mentioned above are not reflected and I was able to verify this when setting my defense. If you continue reading the posts below, you'll see that the inventory screen in the matchup does not show your locked roster, but it shows your current roster only.