I have done lots of this.
You need, an Analog to Digital converter, iMovie, and iDVD.
VCR -> ADVC300 -> Mac. (DVDs come out of the Mac.)
To get your VHS video into iMovie, look at the Grassvally ADVC300. Audio and Video go in, FireWire comes out. It also comes with a nice Macintosh application that works flawlessly with iMovie 06 and iDVD 09/11 (I have used it a few times with iMovie 09 and 11).
The program that comes with the ADVC300 has some nice filters that can improve video and audio of the source material. The ADVC300 will take Audio and Video from any source (VCR, Tivo, Satellite Receiver) and convert it to FireWire (iMovie will treat it like a camera).
I would use iMovie 06 with iDVD 09/11, why?
iMovie 09/11 uses 'single field processing' meaning every other horizontal line of the video is thrown out, which reduces the sharpness of the footage. iMovie 06 uses ALL of the image to form the video.
If your primary workflow is editing DV clips and making DVDs, iMovie '06 is better suited. Your movie will arrive at iDVD in DV format, which is an ideal match for making a DVD: same resolution, same pixels aspect ratio, and original quality. If you share your movie from iMovie 09/11, it gets re-rendered at 640x480 or less, and then iDVD upscales it back to 720x480. The end result is obviously not as good.
iMovie 06 and iDVD 09/11 is a "lossless" combination.