Editing software

my favourite hobby is to capture movies from my digital
dv video cam and edit it to burn onto a cd. However, I
find that if I save in AVI format, the file size takes up
too much space and sometimes hangs when Im capturing the
movie or causes jerky movements in the capture, so I have
to stop, save and record again to get it to go smoothly.
I have used
Windows movie maker but for no reason at all, it makes my
movies blurry and little squares running across it- very
bad picture quality.
Nero, I thought was by far the best software to use, with
burning and etc but wen I went to capture video it hangs
frequently and causes alot of slow jerky movements (In
avi -I think it happens in every software if saving in
avi?)
Muvee I think is better out of the two above but it
stills hangs and takes up too much space.
I dont mind the lack of space but I am worried about the
end result on CD

Will it work better when it is edited and converted into
mpeg? Will it show on tv?
Do you know of a good software (that I can download on
internet) that wont hang if saved in avi format and can
edit without it ruining the captured quality?