Q: Video image quality

To start with, VHS is about the lowest quality of video; supports only about 240 lines of horizontal resolution.  But regardless of that, no matter what the quality of the source video, when it's compressed to MPEG-2 to comply with DVD specs, a lot of information (data) is thrown away during the compression process.  Now you need to edit the video so it will have to be converted into a frame-based format again - all of these steps will cost some of the image quality.  It would have been better to capture the VHS footage directly to your hard drive first rather than going through the intermediary step of compressing to DVD ... but that's water under the bridge.

Since you're using FCE to edit, you'll need to convert the DVD's VOB files into an editable format that FCE can work with natively ... which is QuickTime DV (NTSC or PAL, depending on your location).  MPEG Streamclip (freeware) can do that for you.  Here's a tutorial on using MPEG Streamclip: http://www.secondchairvideo.com/?p=739

-DH

what is the best way to transfer DVD content to Final Cut without loss of image quality.

The best way to do this (in my experience) is to use MPEG Streamclip (free)  + the Apple MPEG2 Playback Component ($20).

Depending on the nature of your original video, for editing in Final Cut Express, the MPEG Streamclip settings may differ.  If your DVD is regular standard def 4:3 material it's best to convert to QuickTime/Apple DV; if you have 16:9 widescreen it's best to convert to QuickTime/Apple Intermediate Codec.

Since FCE only works natively with two formats (AIC and QuickTime DV), the footage from your MiniDV tapes would be about the best you could get.  The quality of the footage on the MiniDV tapes would rely heavily on the original transfer quality and the components used and, of course, the quality of the VHS footage..

-DH