I refuse to beleive that this is as good as it gets - commercial DVDs are much better and this is from a €%&/# VHS, so there should not be any real degradation?!?
You encoded the original video 2 times. There will most certainly be degradation.
Can you give us the exact specs for the QT file? Just open in QT Player and hit Cmd+I to bring up the inspector.
Taking a guess here: The Mpeg-4 video probably contains square pixels (DVDs don't do square pixels) and that could be the problem. The other thing is that iMovie versions newer than 6 don't deal well with SD video, as stated before by Bengt.
Here's what you can try:
• when digitizing try to get the output to DV PAL in a .mov container or .dv
• if you need to edit use iMovie HD 6 or FCE or FCP, then export a self-contained QT file.
• if you don't need to edit bring the DV file directly into iDVD