Whenever I make videos (even though it's not very frequently), I use HyperCam to capture footage from my computer and Sony Vegas 9 to edit clips together.
Here I use free software. I use CamStudio with a lossless AVI codec and VirtualDUB for editing, and then I export the video at 7000kbps and higher using the x264 (AKA H.264) codec from SourceForge. The results come out very nice at the end.