There are two ways to go about making the video conversions. The free way which requires some research and lurking on Doom 9, and the $50 way thats very easy. Your call. Depending on which you choose, I'll have to get my twin brother in on this. Hes a guru in the workings of AVISynth like Misfit here is. I work more on keeping the computer hardware and software in peak condition for his work.
Here's my take on h.264 vs. MPEG-2. MPEG4 I find to be better in every single way except encoding time, and CPU usage for playback. For that MPEG2 wins by far. Here is a simple rundown... If you wish to save the video on you comp, make it MPEG4. Its smaller, and looks nicer than MPEG2 due to chroma and macroblock handling. For DVDs there is no choice. DVD was build around MPEG2 and you cant play any other. Unless your DVD player says it can play Xvid, DivX, (several companies offer players that can handle these with hit or miss results) or h.264 (VERY few support h.264), your only choice is MPEG2.
So this is how I usually do it. When I copy a disc, I use DVD Decrypter to make a make a DVD rip (all the .vobs and .ifos included) to my Harddrive. Then in Nero, I make a MPEG4 h.264 copy for archiving. I then use Nero and select "Make DVD" from the menu. I drag in the folder containing all the DVD files and it does the rest (Shrinking from the Dual Layer to Single Layer Disc size, audio tracks, etc.). Same thing for your videos. In fact, I have made an example for you on how to do it in Nero 7... I apoligize if this looks rough, im in a rush to hit the books again
http://www.everythinganime.org/Nero/DVD%20authoring/1.JPG
Step 1: Open Nero Startsmart
http://www.everythinganime.org/Nero/DVD%20authoring/2.JPG
Step 2: Select "Make your own DVD-video"
http://www.everythinganime.org/Nero/DVD%20authoring/3.JPG
Step 3: Click on "More" in the window it brings up
http://www.everythinganime.org/Nero/DVD%20authoring/4.JPG
Step 4: Select your region (should be NTSC but it supports nearly all of them so just select the country you want the DVD to work with) Additionally, make sure Nero's SmartEncoding is enabled.
http://www.everythinganime.org/Nero/DVD%20authoring/5.JPG
Step 5: Choose quality settings. Setting Max will get you about 60 minutes of video at best. So for longer movies its best to his automatic. Nero will lower quality as little as possible. There is a big difference between DVD and S-VHS. You have ALOT of headroom to lower quality without seeing anything different from the original.
http://www.everythinganime.org/Nero/DVD%20authoring/6.JPG
Step 6: Choose progressive or interlace. If you select automatic it will transcode to whatever the original file was. Otherwise you can tell it whether you want it to interlace it if you have a progressive file, or if you want it do deinterlace it if you have an interlaced file.
http://www.everythinganime.org/Nero/DVD%20authoring/7.JPG
Step 7: Select "2-pass VBR encoding" Provides the best quality. Additionally you can select "Automatic" for the aspect ratio.
http://www.everythinganime.org/Nero/DVD%20authoring/8.JPG
Step 8: Select the audio format. I still recommend automatic.
Close the options and the more boxes and we are back to the original area to add video. Click on the Add video files options and we go to step nine.
http://www.everythinganime.org/Nero/DVD%20authoring/9.JPG
Step 9: Locate your video. For these purposes I chose my Midori no Hibi anime series. Its AVI. If you can see the video, Nero supports it. Just click on one or more files and select open.
http://www.everythinganime.org/Nero/DVD%20authoring/10.JPG
Step 10: Video is now added. You can see at the bottom how much video you've filled. At max quality it takes 1.4GB to make the video. On h.264 its 120MB. See the difference between the two?
http://www.everythinganime.org/Nero/DVD%20authoring/11.JPG
Step 11: Make a menu.. You can experiment here and put in image backgrounds and music. But I dont have the time to get into that.
http://www.everythinganime.org/Nero/DVD%20authoring/12.JPG
Step 12: A test. See how it would all look when you burned the disc.
http://www.everythinganime.org/Nero/DVD%20authoring/13.JPG
Step 13: A final summary and a place to tell Nero where to burn the disc to. Whether to a drive or your harddrive.
http://www.everythinganime.org/Nero/DVD%20authoring/14.JPG
Step 14: A final picture of bro's comp transcoding. Thats a 24 minute video. Shows 34 minutes to transcode so you can see the ratio.
And thats it! It spits the disc out when its done. Nero is expensive ($70 although Nero Recode *might* do all this particular stuff and its $50). For all me and bro do, its money well spent.
Additionally, Nero can capture video. This is the video passthrough system could be used for. Though honestly, I would rather just drag the file off and convert it later. But I'll show you non-the-less with my craptastic Logitech webcam.
http://www.everythinganime.org/Nero/Video%20Capture/1.JPG
Step 1: Gone into Nero Vision and selected "Capture Video to HD"
http://www.everythinganime.org/Nero/Video%20Capture/2.JPG
Step 2: It searches for video sources and finds my webcam. It then does various tests to see the available resolutions before bringing up options. Here you can select what video format to capture to (MPEG1,2,4, and AVI are the choices)
http://www.everythinganime.org/Nero/Video%20Capture/3.JPG
Step 3: Selecting the color space format (Honestly that varies too much depending on the codecs you have installed)
http://www.everythinganime.org/Nero/Video%20Capture/4.JPG
Step 4: Selecting the compression. I select none.
http://www.everythinganime.org/Nero/Video%20Capture/5.JPG
Step 5: Audio compression. Once again I select none.
http://www.everythinganime.org/Nero/Video%20Capture/6.JPG
Step 6: Press record. This is when you'd press play on the camcorder and the comp would be recording the video in a raw AVI format.
http://www.everythinganime.org/Nero/Video%20Capture/7.JPG
Step 7: Press stop. The video saves, and when you hit next you can do other things with it.
That is also the method you would use to capture video from the video capture box using Nero. VirtualVCR and Virtual Dub are two other good options as Misfit said. Try them all and see what you like best. We will be here each step of the way.
If you need to do this super cheap, then as MisFit said, there are many programs you can use under AVISyth to get the job done. It takes a little know-how and some time to get it right, but you would have the help of me, my brother, and of course MisFit to help you.
But if you intend to do ALOT of this, I would just suck up the loss and get Nero 7. Its your choice.
I have to go study now!

Later guys!!