Okay, lemme lay some info on you.
First off, you can actually do this (probably better) with VirtualDubMod and HuffyUV to get your "source" video. From there it can be converted with a number of programs to DVD format, such as DIKO and TMPGEnc. Let's go over the process, shall we?
First off, you need to get the
HuffyUV codec and install it, along with
VirtualDubMod. Once you've installed them open up VirtualDubMod and select File->Capture AVI. From there you should be able to pick out the areas with the appropriate settings. You need to set your video compression codec to HuffyUV, set your colorspace to YUY2 or UYVY, and your audio codec should be 16-bit PCM at 48000Hz, or 44100Hz if 48 is unavailable. Also, your resolution should be 352x480, nothing higher. The maximum horizontal resolution a VHS tape can ever achieve is 200. (If it's SVHS or SVHS-C you can go higher, since SVHS can acheive a horizontal resolution of 400) Once there just fire up your player and hit record in VDubMod. You should be able to capture just fine, though the filesize will be large.
After you have you resulting AVI file your next step is to convert it to DVD format. Contrary to popular belief, you CAN in fact encode in resolutions other than 720x480. In this case 352x480 will do. Now for the purposes of customizability we are going to assume you're using TMPGEnc for this, rather than DIKO. DIKO will work, but since the video WILL be interlaced (
always is on analog broadcast or VHS) you have to jump through some extra hoops to convert properly. TMPGEnc can handle it just fine.
Before you open up TMPGEnc you'll want to download the
KDVD Half-D1 template and save it to your TMPGEnc/templates directory. When you open up TMPGEnc you'll be presented with a Wizard. Scroll down until you find the KDVD template and click next. Hit browse and select the ginormous AVI file you just made. Change the video type to Interlace and the Aspect Ratio to 4:3, then hit next. On this screen you'll want to go into Other Settings, and in the Video tab set the aspect ratio to 4:3 and the encode mode to Interlace. You may also want to click "Setting" next to Rate Control Mode and increase the CQ setting and the maximum bitrate setting; a CQ of about 90 and a max bitrate of 4000 should do it. Click OK. If you have a particularly noisy tape you may want to enable the Noise Reduction option here. Anyway, click "next" twice, uncheck the "start encoding immediately" box and hit OK. Towards the bottom right you should notice a number of radio buttons: select the one marked System (Video + Audio), then click "Settings". Go to the Audio tab, make sure that the frequency is set to 48000 and that your bitrate is at least 192. You might also enable error protection to be safe. Hit OK again and then hit start. Your video should start encoding nicely. Once you're done just create a new DVD with the freshly-created MPG file using something like Nero.