I've never captured VHS, but generally, always capture in the highest quality you can, ie not mpeg2. DV if you can.
I have Studio9, but creating a dvd menu is no problem. Put some blank or whatever pic you want your title to run over at the start of the timeline, double click the title line under the blank/pic and the title menu opens. Type your description of each chapter, hit the button icon on the right, add an actual button if you wish (drag and drop) or simply highlight the text and make it a 'normal button'. when you are happy with the title page press 'ok'.
This takes you back to the timeline, double click the title area, and this opens the dvd chapter menu. Click/highlight the 1st button, then move your cursor to where you want the first chapter to start, and click on 'set chapter'. Repeat as necessary.
In 'make Movie', 'disc', 'settings' choose any bitrate that allows you to put the amount of video on the dvd that you want. Probably less than 5000 is not a good idea, better to make two DVDs.
Win XP, Athlon 1.8, G force 3 T, 1 60gig drive + 1 250 gig, Pinnacle Studio 9 plus mostly, Premiere 6, and Vegas 5 sometimes, Soundforge, Cool Edit.