I have had similar experiences capturing VHS into a digital format, I have a TV card (you can pick a nice one up for £40) so it thusly is a hardware encoder/decoder. It has an s-video input so I can plug something in and record in realtime.
Just take a sound feed in via my sound card to capture the audio and Bobs your uncle. You will obviously need some video capture software and audio capturing software or preferably some software that can take the video feed and audio feed and record them together to save later mux'ing them together.