Unfortunately VHS looks like shit and if you have some spare time you can clean it up greatly using Avisynth along with plugins. Unfortunately MPEG-2 isnt a suitable format for this kind of operation since its lossy. Grab a good TV-card such as Leadtek TV2000 XP Expert and hook it up to video using perferably S-Video (if possible) otherwise composite. Record it in full DVD resultion and 48 000Hz 16-bit stereo sound using a lossy format such as HuffYUV (you need quite a bit of disk space free). Grab a copy of Avisynth and read the documentation. Grab TMPGEnc Plus or another encoder of your choice that supports Avisynth and start encoding.
FVIW here a sample of what I mean, this is a screenshot of old swedish cartoon.
The source is an VHS-tape that roughly 15 years old recorded off an analogue TV-source. You can imagine that it didnt look great but after a bit of abusing it looks pretty good. I have to admit though that it took quite a while to render on my AMD XP 320+ (non Athlon 64). For the record I used 4 filters to clean it up.
Oh, I almost forgot to mention.
If you have a somewhat new video card you might already have video input capability.