Did he or did he not know their atheist/death state at the same time he allowed them to be created?
Yes. But the question that the God-out-of-time idea was supposed to answer was, how, if God has FOREknowledge, can we possibly have free will?
We come to a fork in the road, and we can choose fork A or fork B. According to the God-in-time idea, God knows that we will choose fork A. Therefore, how can we possibly choose fork B? Therefore, we have no free will.
But if God is outside of time, He does not know ahead of time what we are going to do. There is no "ahead of time." So we have free will.
Now the other problem is, why did God create Schraf in the first place, knowing that she would be an atheist? But by phrasing it this way, we have jumped back into time again. Even God cannot know what does not exist: and what does not exist--in God's Reality--is the past or the future.
And, yes, this view is supposed to be compatible with omnipotence and creation.