I've spent several weeks trying to get something near an original-quality capture from a VHS tape with the capture card I bought (Avermedia DVD EZMaker), and haven't succeeded yet. Seems to be a bit of a crap-shoot, unless you're prepared to spend several hundred dollars. The newsgroups I've visited in my quest are littered with sob stories around both the harware and software required to get the job done. I myself have installed 4 different capture programs, and gotten three additional CODECs without finding satisfaction.
I have been looking for one of those external devices that will do a lossless capture (not MPEG2 or DV output, which have compression by default), and haven't seen one under my self-imposed $300 limit. (If anybody has a recommendation, let me know)
Keep in mind there will always be trade-offs in space vs. quality. To get a truly lossless picture, I think you will only get about an 1 - 1.5 hours on a DVD. Two hours on a DVD says to me some compromises are being made.