Using WinXP vlc version 0.8.1 (was the same with 0.8.0 and don't know about earlier versions as I started using vlc at 0.8.0), with movies copied to hard disk, menus can not be used. (NOTE: this happens with all movies tried, regardless of whether all the movie files were under the main movie directory or under a VIDEO_TS directory which is under the main movie directory) Nothing shows up in the navigation pull down either. You can use skip to next chapter button to visit each file in the directory in sequence by name, and movie appears to play fine once you get to the movie. When playing an actual dvd disc, the menus do appear to work most of the time (see below). As a point of interest, the same movies on disk when mounted to a linux box using vlc 0.8.0 (haven't compiled 0.8.1 yet) the menus do work and chapters do appear in the navigation pull down.
As a separate issue for dvd menus, specifically the DVD disc's for the TV show Firefly. These discs have 4 episodes on each disc. With these discs there is a main menu to select the episode and then once selected another screen with menus comes up and you can select play, scene select and one other thing. The menus on this second screen do not work. In fact, you can't even get it to play without going to the navigation pull down and selecting a entry from there. I have only experienced this on the WinXP version of vlc and have not tried it on the linux version yet.