Others will have their own view. Personally, I don't think what you did at the beginning of the project is causing the problem.
Rather, I think it is at the end of your editing process and beginning of your authoring/burn process. You are clearly getting a message in the burn process which indicates that Video Studio is trying to convert your project as part of the burning process and is failing to do so. This is the big no-no if you are in fact using a DVD-compatible mpeg-2 in the burning module!

But I don't think you are...
It is of course possible to go straight from the editing timeline to the burning -- a lot of people do it this way successfully. But a lot also have the sort of problem you are having. That is why we suggest that, after editing is complete, you first go to Share > Create Video File > DVD, to produce the DVD-compatible mpeg-2 file and save the computer the hassle of trying to do it as part of the burning process, which is complicated enough without that extra burden.
As for getting an empty timeline, once you have finished editing and produced your DVD-compatible mpeg-2, you Save your project. Then you simply go to File > New Project. (If you haven't saved the existing project, a dialogue box will appear asking if you want to save it. Select OK.) The existing project will disappear and an empty timeline will appear in its place.
If you don't do this, then when you open the burning module (Share > Create Disc), your project will by default appear in the burning module 'timeline'. And this is what I think is happening in your case. Proceeding to build a menu and burn based on the *project* file being in the burning timeline means that the burning module will try to first convert it to DVD-compatible mpeg-2 on the fly -- regardless of the fact that you have already done this at the end of the editing process before even opening the burning module.
So if you follow the above procedure for closing the existing project, have an empty timeline, then open the burning module, nothing should appear in the burning module timeline. The DVD-compatible mpeg-2 which you created -- which will have an icon in the Library pane -- is what you now insert into the burning timeline (using the Add Video button in the top left of the VS8 burning screen).
If you have made sure 'Do not convert compliant mpeg files' is ticked in the second icon, then the burning module will now NOT try to convert what is already a DVD-compliant video file. Instead, it will simply convert your menu to video, multiplex the video and audio and burn. If you burn at our recommended speed of 4x, then this new burning procedure should take no more than around 20 to 25 minutes.
(As a footnote, if you don't follow the empty timeline option, then when you open the burning module, you should manually remove whatever Video Studio has inserted in the burning timeline, and manually replace it with your DVD-compatible mpeg-2 from the Library.)
As for adding chapters, in the burning module -- with your mpeg-2 in the burning timeline -- you should see a button which is third down of the four icons in the top left of screen, and says 'Add/Edit Chapter'. Click on that, and another screen will appear. There will be button labelled 'Auto' to the top right of the preview screen and it should be highlighted. Click that and a new screen will appear asking whether you want to set the chapters either by a fixed interval of time or by scene. It will also offer to auto-select scenes. If you select this option, it will take some time.