Hi there everyone, it's been a long time since my last post.
Welcome back

1) Is it best to just set the VSTi up as an instrument and then program the notes into the pattern direct or should I be recording the notes played on the VSTi and then loading them into ModPLug as individual samples?
Both techniques can work. It depends on what you want to achieve. If you want to distribute the module itself, or want to have full control over the sound, you'll want to go with samples. If you however don't want to do that, just using the VSTi's is the way to go (unless of course your computer can't handle it) The biggest difference is, that with a VSTi, you can tweak and control (using midi macro's) the settings after a while to improve your song even more. If you were using samples, you would need to go through the entire process of recreating the samples again.
2) And my second question is can you apply VST effects to a VSTi instrument? So if I am using the Synth1 VSTi for example, is there a way I can apply the Classic Delay effect to it and then tweak the settings as the song is playing?
Sure. There are several ways to do this. You could use a chainer plugin for this, like Xlutop Chainer (not free) and there are more, but luckily, modplug also offers this function.
After you load in a plugin to a slot, ensure that the next plugin you want to link to is on a higher slot (lower in the list). Say: you have a plugin on slot 21, the next one will be on 22 or higher.
Select the first plugin and on the right it says output: master. Change master to the number of where you have your delay plugin.
While the song is playing you can tweak the sound and other settings like the delay. This also works when a pattern is playing.
I often create a new pattern, put C-4 on the first row, put a note off (===) on the 4th row, and place FX C00 on the 8th row. I then continuously play the pattern and tweak my sound.