I chose the digital option for recording (Olympus DM1). Advantages: small and easy to carry around, unobtrusive in interviews, don't have to worry about buying or changing cassettes, can download recordings straight to PC for storage, doubles as an MP3 player. Disadvantages: none that I've come across yet (but I've never tried recording with conventional cassettes). There is a discussion on digital recording at http://davidson.cba.hawaii.edu/digitalrecording.html which looks at some of the issues.
On the transcribing question, hiring someone to do it could work out pretty expensive, unless you have a VERY generous department who will pay for it. I was told that yes, transcription is tedious, but as a PhD student you are expected to do your own (sort of rite of passage I guess). On the positive side, I do find I get to know my data very well by the time I have transcribed the interviews, so half the analysis gets done in the transcription process.