All great suggestions, my bug is literally driver related, VirtualDub triggers it with Overlay turned on while capturing (even though it stops showing it during captures). I have the solution now for a smooth loseless 720 x 480 capture. My CPU usage is about 40% I think, 0 dropped frames, audio is +-1ms sync, hardrive is about 20% of its throughput. Because of the debugging I had to do, I had almost every service disabled including networking, its a fresh build with old stable drivers only video editing required software is installed at this point. Its also disconnected from da dubia dubia dubia, what a pita.
Sys. ~specs. P4 2.8c w/ 1gb ram @ pc2700, sapphire ati radeon 9800se, a sapphire ati theatre 550 (capture), sata-I connected 500gb seagate and 2TB western digital both @7200 rpm, 16x lg dvdrw, some chezzy onboard Sis sound. She has plenty to go for capturing the 2TB is brand new after I figured out another 500GB drive I had would be taking a dirt nap... <<=15mb/sec @ 65 degress celcius. Thank you tuneHD.
The only issue I see with your strategy is you can't play off a camcorder, and if you can the output might be delayed. If the damn capture device has a passthrough output as well your laughing... so in our case we do need a split amplifier to pull it off properly, especially for the audio as my splitting it to the stereo and PC seems to destroy the quality most efficiently.
A truly digital capture would be awesome but I don't have those kind of skillz.

I'm on an NTSC c64 so I'm capturing at 60 fps progressive (now) and going to need to deinterlace it with a bob filter (TFF) to get nice square pixels and to get rid of the dreaded combing effect.
I also need a separate machine to capture voice for 2 - 3 hrs, with an omni mic of some quality preferably tied into a half decent sound card. Even a laptop 486 would work if its harddrive was big enough.
Hopefully I can clean up what I otherwise can't technically pull off. An iPhone works ok I think, but it's not capturing loseless, or decompressed so it makes cleanup and edits a total bitch.
I'm learning but its not easy to get a perfect capture. A perfect digital capture will have to wait until I am better funded and some sorta idiots guide comes along.
...its also going to be a pain to clean out all the pausing we do in a game sometimes.... 1.5 hrs will be long enough lol....
However all that said I am extremely pleased with the quality I know I will get in the end, I have tried some SID plugins with WinAmp and the sound you get just isn't right -- the emulators can't quite get it right or my available sound cards aren't sufficient.
I will make a post in the general area and post a capture of the intro music I cleaned up a little and made into an mp3. Roy Glover rulez I hope no one minds me showing it off?!
Thanks again for all you help.