1.) You can purchase a combo VHS/DVD recorder. Most, if not all, will have a COPY button, that will begin playing the tape and burning the DVD, all in real time. This method requires little interaction from you. You hit 'Copy', walk away, and after your tape has played through and the DVD copy process has verified, you will have a DVD copy.
If you use two separate machines, you will need to connect the video and audio output of the VCR into the DVD burner. An S-Video connection will yield slightly better quality picture, but purchasing an S-Video cable is not worth it if your VHS tape is of poor quality to begin with.
2.) iMovie will let you create chapter breaks, edit/trim unwanted footage, add scene transitions, add photos, music, or text to your video.
iDVD allows you to actually 'build' the DVD. You can pick how the menu looks, add pictures to the main menu screen, add text to the menu, add menu music, etc. You export your finished movie from iMovie into iDVD. iMovie lets you mess with the actual footage you want on the DVD. iDVD gives you control over menu things that you see when you first pop in a store bought DVD - ie, the menu picture, the little chapter/scene windows, what you want the chapters to say, how you want everything in the menu positioned, pictures, music, etc. iDVD gives you several templates to use to customize how your DVD menu looks. If you are making a DVD to document travel, there are templates with travel themes...globes, passports, etc. They have 'drop zones', where you drag and drop photos of your own, and these will scroll with the DVD menu animation. You can also pick a song you like to play in the background. The DVD menu will loop over and over again until you scroll and pick a chapter or movie with your DVD remote control.
3.) If you use a DVD recorder to go directly from your VHS tapes to DVD, yes, you will need a special program. These programs are free. Handbrake or Mac the Ripper will do the job. The files on DVD's are .vob files. iMovie cannot work with them. Handbrake or Mac the Ripper will pull the .vob files off the DVD and convert them to mp4 files that iMovie can work with.
4.) It's not necessarily a 'better' way of doing things, but it involves less interaction on your part than using a video capture device plugged in to your Mac. I can't see quality being better than one or the other, really. Both are doing the same thing, and the default setting for either a DVD recorder or Daystar or Elgato or whatever is likely better quality anyway than the original VHS tape. However, you will have more control over things with the Daystar Xtraview vs. a DVD recorder. With a DVD recorder, it just copies the tape...that's it. Daystar Xtraview software gives you control over many of the parameters involved with the conversion.
Fact is, you are going to have to jump thru some hoops and invest a considerable amount of time to convert your analog VHS tapes to digital files no matter what you do - unless you pay someone to do it for you, and then it will be quite expensive if you have a lot of footage to convert. Most places charge, at minimum, 20 dollars per 50 feet of tape - and this is conversion to DVD only - no editing whatsoever. Editing is entirely up to you.
I decided to convert with the Daystar Xtraview, as I noted in your other thread. I've used iMovie and iDVD to put everything together into a package, and I've had fantastic results. Like I said... It's time consuming and you will have to jump thru a few hoops unless you pay to have it all done for you. My respect for what Apple software and Macs can do has only shot thru the roof. I tried doing all of this originally on my Windows machine, and it let me down time and time again when it came to editing movies and burning DVD's. Now with a Mac, I actually get results and an excellent finished product that I'm proud to hand out to family and friends.
Oh, and yes... 120gb's of storage is plenty for conversion. I have no idea how many tapes you have to convert though. This all hinges on if you want to keep the footage you convert, or if you plan on trashing it after you have made DVD's. I keep all of my important footage, but I had more than 800gb's of storage to begin with.