Reading my windows help it appears you need an analog capture device and software to input from a VCR.
Video cannot be imported from an analog video camera or VCR when using Import Video or Windows Movie Maker. To import video from an analog video camera or VCR, you need to have an analog video capture device installed on your computer, and then use software that enables you to import video from an analog capture device. For more information, check the documentation that came with your analog capture device or go to the manufacturer's website.
This usually involves converting the analog RCA 'out' from the VCR to digital 'in' to the PC via USB or firewire.
You can then use the software provided with the analog converter or Windows Movie Maker to edit and burn to a DVD with proper theme, title and menu.
You'll need a DVD burner to create a DVD. If you buy a new external or internal DVD burner, player or combo drive make sure it is compatible with your operating system. There are some cheap ones on the market right now but they are not compatible with Windows 7.