First of all: Use
Mini vMac, not vMac. Despite its name, it's a lot more current and full-featured than the official vMac branch, which hasn't been updated in years.
The latest version of the Mac OS you can get for free is 7.5.3, which is available from Apple's site
here. Additionally, you can update that to 7.5.5 via a free update available
here. However, since Mini vMac emulates a Mac Plus, and I'm not sure how well 7.5.x would run on a Plus, you might be better off with
System 6 or
System 7.0.1, depending on what old stuff you're trying to run (System 7 broke a lot of black-and-white stuff, so System 6.0.8 or even 6.0.5 might actually be your best bet if something doesn't work in 7.x). It's a pity Apple doesn't provide System 7.1 for download, because it was the most stable of the 7.x versions ("stable" of course being a relative term when we're talking about System 7).
For the disk images, all you have to do is make a disk image in Disk Utility. Make sure the format is Mac OS Standard (not Mac OS Extended), encryption is set to none, partitions is set to no partiton map, and image format is read/write. Then you can put whatever you want on it, unmount it, change the extension to .dsk, and you should be good to go.