Noely,
I've done a lot of this. A few years back converting VHS to VCD's and more recently to DVD's.
To get good results with cheap hardware isn't easy but it is possible. As Philly says the cheapest way of doing it is to get one of those £20-40 TV cards. They have a raw capture mode. Use a compression format like PICVideo's MJPEG (good quality and small processor requirement - so fewer dropped frames). Or a lossless format like Huffyav. There's lots of free software to do this - and you'll get differing results with all of them

- start off trying the basic capture utility that comes with the capture card - and come back if you have problems - this software is usually matched to your card. Try and use a decent operating system - Windows 2000 or XP. And try not to run anything else while you're doing the capturing. You need a fast system - and especially a fast hard drive for few frame drops.
As well as the compression format, you need to also choose the frame size you want to capture. This is tricky - because it does depend a lot on your system. And because you're capturing an analogue format - there's controversy on what resolution you need to capture at. Have a look at all the help sites (start with
vcdhelp.com). But for VHS to DVD 352x576 I've found is the best setting. Of course as Martin has mentioned you won't get quality better than the original source, but I've still got some very good results where I couldn't tell the difference between the original and the DVD or VCD.
Once you've captured your VHS tape - with as few frame drops at possible you'll need to convert to MPEG-2 format to put on your DVD. I would use
TMPGENCfor this (30 day trial). This is time consuming. Then you need to author the DVD. I would use
TMPGENC DVD Authorfor this - by far the quickest and simplest DVD authoring package I've tried. It'll even write the DVD. And has simple editing features to chop out the adverts etc.
A slightly more expensive option is to upgrade your graphics card to an ATI All-In-One card - I have a ATI Radeon 9800. These cards have a combination MPEG2 hardware/software encoder built in so you can capture straight to this format and then just edit and burn to DVD. MUCH quicker. And the capturing utility works really well. I wish I'd had one of this cards earlier on! There are others but I'd read very good reviews of these ones - and they are good for gaming too if you're that way inclined

.
Feel free to come back with more questions. It's fun to do - but don't expect instant results! A lot depends on how much you have to do. I wanted to get all my Seinfeld tapes to DVD (plus NYW). After spending ages slowly acheiving this - they are finally releasing them on DVD - typical! (Having said that I've bought the first two volumes and they are packed with extras

).
Have fun,
Gidon