There is a way to get chapter markers but it's fairly involved I don't bother with it. For most disks, the audio is DTS so I have to use MakeMKV to make a .mkv files of the disk. I then use ClownDB to extract the DTS and convert it to a DD .AC3 file. I put that aside, then I convert the MKV using the Apple TV Preset in Handbrake 0.94. I convert it with no audio tracks just video. I take that .m4v file and I feed it into YAMB. I Add the .AC3 file also into YAMB and have it attache the vid and audio files and write out a New .m4v file. Put that in Itunes and I get a perfectly playable 1280x vid.
Just an FYI for you since you are doing a whole lot of steps to get DTS to AC3. I did this yesterday and it works great, once you finish doing these scripts its just one easy terminal command to go from DTS to AC3 and just drag and drop the file into the terminal right after the command. Just remember to install X-code from you OS Install disc before you start to install the scripts.
http://www.lprestonsegoiii.com/2009/09/install-script-for-mkv-dts-to-ac3-snow-leopard/
I think this article should be a sticky on here since this is very useful information.