It’s a little bit tradition, and a little bit format-related.
Back in the dark ages, DVD Authoring tools only accepted completely finished assets. They did a little basic MPEG-2 rendering for menus, but didn’t convert you video. DVD was a new format, and nothing you had in your video editor or encoder produced something in DVD format. Apps took MPEG-2 elemental streams, WAV files, AC-3 files, or MPEG Layer 2 audio files… they did the DVD multiplexing, etc. from those simpler formats — which also got the DVD authoring apps done quicker.
This is still a tradition with Vegas and DVDA. The main reason DVDA accepts a DVD-format MPEG-2 PS rather than elemental stream are chapter marks and other imports… an elemental stream is just the MPEG-2. There is no official standard for AC-3 or uncompressed in an MPEG-2 file (technically, the .VOB file format on DVD is an extension of the MPEG-2 format that supports these, but this not part of the MPEG-2 standard). You COULD technically produce an MPEG-2 stream with MPEG Layer 2 audio an author a correct DVD… for Europe. On Region 1 DVDs, MPEG Layer 2 is a secondary format (optional playback on player), not a primary format (mandatory playback on player).
As for how long your video can be … 4,700,000 bytes. That’s the real answer. You can use a bitrate calculator to figure out how much compression you need, based on your audio type and video length. Then you compress it, using the best quality 2-pass encoding from Vegas (don’t leave it to DVDA to compress), and then burn a preview disc, and determine if you’re happy with the quality.
I made a small film back in 1994 which went to DVD some years later (using one of the aforementioned early DVD authoring tools, Pinnacle Impression, formerly Minerva Impression, possibly the most bug ridden piece of drek I ever managed to coax useful work from). The main film is 2 hours long, there are some 30+ minutes of outtakes and other special features (a photo gallery, music videos, etc). It looks good because, frankly, the video was crap. I shot it 1994 in Video8, not even Hi8, and the DVD was compiled from both the original tapes and an SVHS master. So a little more compression there didn’t greatly impact the video, because the whole video process was low-pass filtered. I’m not suggesting an HD downconversion will look acceptable a 3 hours or more on a DVD, but it’s up to you.
-Dave