This guide has probably the best way to capture the video and then encode it to whatever format you want.
Just from skimming the article I see that they recommend the Huffyuv codec for capture... as they should. Since I used to hang out around with a bunch of TV cappers on a certain IRC channel, they'd be talking about how to capture video, etc. etc., so it turns out that they recommend Huffyuv to keep the quality but halve (more or less) the space required for it.
They're also suggesting using VirtualDub as well. All I can say is, bravo.
The only thing that I'd be concerned about is your capture card. Since the article was written in 2003, I'm fairly certain that there is a chance that there are better/less expensive cards out there for you to use. However, capturing video hasn't really changed in that time frame (afaik). You don't have to worry about a HD source either as you're going to capture VHS video. Perhaps the cards suggested in the guide are sufficient.
I also believe the Doom9 community
could be of service to you. This guide
may be of some use.