I would recommend finding a Digital8 video camera and play your Video8 video through that. Use a Firewire cable to transfer it to your PC (you will need a firewire card [also known as 1394] in your computer).
You can use WinDV (windv.mourek.cz) to capture your DV-AVI file (13 gig per hour). The DV-AVI file is perfect for editing.
This is the easiest solution and will retain most of the quality of the original tape. Once you've edited your video (in Premiere, Sony Vegas) you can render your timeline to MPG-2 using their built in encoders or you can use an external MPG2 encoder if you want...

Do not use a DVD Recorder if you want to edit the footage. Also, most DVD recorders produce sub-par encodes.

Do not use a USB connection from your video camera. It is only useful for low quality "web" video.

I would avoid using a video card with analog inputs. Firstly if your computer isn't up to it, you'll be dropping frames and if you want to use a codec that's comparable from what you'd get from a firewire card, your resulting file will be much larger anyway...

If you don't want to use a Digital8 camera to do the transfer, then take a look at the Canopus ADVC 110.
http://www.canopus.com/products/ADVC110/index.php
This will enable you to capture any analog source (video8, hi-8, vhs etc.) just as long as you have something to play your orginal recording. It will convert the video into the DV-AVI format.