I'd go USB over any type of encoder or hacked keyboard.
All my projects involve using an analog Playstation 1/2 controller and using adapters to make the joystick compatible with the PC and all the other consoles in the market.
My 2 cents....
Using a playstation controller hack is not a bad idea. Then all you would need to do to use the controller on a computer is to get a psx to usb adapter. But the one gripe (only one, but it was a big one) my friends and I had with this adapter (we each got one of these at our local fry's electronics
http://www.neoseeker.com/Hardware/Products/Soyo_KikyJoy/) was that there was a split second lag between pressing the button and it registering in the pc. For most games, in mame, this really isn't a problem, but with games that required joystick movement and button combinations (ie throwing fireballs ala SF2), it was a bit difficult to throw fireballs consistently because of this "lag". Maybe it may be a bad brand of adapter but this adapter was sold (in Fry's stores) along with DDR for PC so people can use their DDR pads on a PC.....(that game does require perfect synchronization with button presses to the music....)
On another note, using a keyboard encoder (I use Ultimarc's IPAC2), this "lag" is non-existent and I can "throw fireballs" easily and consistently. I don't play much with non-PC game systems (ie playstation, gamecube,etc) anymore so I guess that's why I don't need the playstation connection.
But, I guess, whatever floats your boat...
To Barkuti: A keyboard encoder is definitely better then a keyboard hack simply because ghosting is non-existent, no soldering, and the keyboard encoder is way,way smaller to fit in a box.
Now, Keyboard encoder vs usb gamepad hack???
One thing is, the keyboard encoder only needs one usb connection for up to 2-4 players (depending if you get the ipac2 or ipac4 from ultimarc), where you would need 1 usb connection per player [with a game pad hack](up to 4 usb connections!!).
Another thing , an IPAC2 keyboard encoder will go for $40.00+12shipping. Now, if you're able to get 2 "satisfactory"(meaning, it may be a cheap/no-name-brand/used/whatever but you don't care) usb gamepads, for $10.00 each, then fine going that route is better. But usually, a decent game pad will go for $15-$20(at least a year ago). Consider that math, then decide. Plus, again, no soldering with the ipac, just screwing in wires.
Well, I guess that may haven been 4 cents or more...
Have fun with your new project!