From someone who bought the wrong stuff...
Here's my two cents... :)
As rosends said, you'll need a usb video capture or a card. Be sure this hardware supports 640x480 resolution or higher. If you don't see this on the box, it probably means it uses lower resolution. You might hear that recording in 352x240 or whatever doesn't matter because that is VCR resolution anyway, but that is NOT ENTIRELY CORRECT:o. In order to get a decent looking video, you need to capture at high resolution and then run a deinterlace filter. Then resize the video to the lower resolution video-cd format. (OR, better yet, make a Super Video CD or a DVD:)) Buying the low-res recorder is cheaper, but it is a waste of money. I have a low-res one and the results are very poor. Check e-bay for a high-res video capture device.
After you buy your video capture device, be SURE not to just buy any random video editor package. Instead, do an internet search for the excellent free software Virtual Dub. It can capture and encode video... with that and some other free tools you can create a video CD image you can burn with any CD writer software. You'll find the results are great. The only downsides to this is that you won't have the "filmstrip" editing interface or on-disc menus, and that the learning curve will be steeper, but once you learn the programs you will find they are very easy to use.
I have tried out some commercial video editing software. Yes, they have great features, but in my experience, they are unstable and rarely produce the desired results... definitely not worth the money. The software is good, but needs some serious beta testing; I'm sure the programmers are great, but I think the production was rushed or something... check the official message boards at websites like Pinnacle and Dazzle and you'll see I'm not alone. But then again, it might just be me... so if you want you can try the commercial editors out. Maybe you'll have better luck than I did :).
Hope this will save you some frustration.
Good luck with your Video CDs
~psi42
P.S. If any of this information is wrong, don't yell at me. :) :)