The only specialised hardware you'll need is a capturing card and of course the LD player. And lots of hard drive space. I've done a few LD to DVD conversions now including the original Star Wars films.
For capturing, I use a Canopus ADVC-1394 which dumps the incoming analogue video directly to DV format. It works really well.
As for software, you can use a pile of different stuff for capturing but most has features you'll never use. Myself I use a freeware app called WinDV which is really small, really simple and does the job perfectly.
I think you're going to find hard drive space an issue with 2x36gb drives. My capture of the first SW film (2hrs) is around 26gb. Ideally you need at least double that - minimum, to give yourself room to make edits etc. You don't need hyper-fast drives for this task so you may want to consider going for higher capacity. My DVD/Video rig has 2 x 185gb Hitachi drives and I have no issue with speed.
For software, it really depends on what you what to achieve. If you're just looking at basic editing (splicing the LD side captures together, removing blank bits etc etc) then freeware app VirtualDub does a fantastic job if you're using DV format captures. If you're intending to do more serious video editing work then you need to look at packages such as Adobe Premier (expensive and typically difficult to learn) and Video Vegas. I got the LE version of Vegas included with my Canopus card and I've used it to replace the subtitles for the Star Wars transfers with burned-in subs that sit in the lower part of the film frame. I've not really looked any further into it though.
For MPEG2 encoding purposes it really doesn't get much better than TMPGEnc unless you're prepared to pay $2000 to use Cinema Craft Encoder. TMPGEnc isn't pretty to use and it does have a few quirks, but the quality of the encoding is fantastic. It's not fast - expect a 2hr film encode to run for a day, more if you start using the filters but it's worth waiting for.
btw, people often ask about 'on the fly' encoding to save time (i.e. converting while capturing). Basically, if you want good results, forget it unless you've got thousand of $ to spend. The best way is capture, then encode.
A lot of people seem to have problems with keeping the captured audio in syn with the video. The Canopus cards though are particularly good at keeping sync - perfect sync in fact. The audio is captured are the same time and is part of the .avi capture so it's just a case of stripping out the audio track using VirtualDub (like I said, great app!).
For processing audio you can use freeware such as BeSweet to convert the audio file to Dolby Digital.
Once you've got the encodes done you need to consider how you're going to get it onto the DVD. If you want anything more than the most basic, rudimentary discs then a decent authoring package is a must. I've been using the $100 DVD-Lab now for a while and it's great. It has featues you'd normally have to pay $400 for.