Digital video editing is something I've been heavily involved in for the past 6 months or so.
If you don't want to be frustrated with the process make sure that your equipment can handle it. As you found out the capture files are gigantic. It takes 200 megs for each 60 seconds of video. But the good news is that hard drives are cheap. I would recommend a minimum of a 60 gig hard drive. In fact it will be even better to have 2 drives: one dedicated to captures only. Here's my setup:
Pentium 4 1.4Ghz
60 Gig hard drive
30 Gig hard drive
128 Meg RAM - bare minimum
32 Meg video card
Canon Elura 2MC MiniDV camcorder
The software I chose is the StudioDV from Pinnacle. It only costs $90 and comes with a FireWire card. In addition it has a nice feature allowing you to capture in 'Preview' mode to avoid filling up your hard disk with the AVI files. However I find it less problematic to capture in full resolution.
The sequence of events I usually follow is as follows:
1. Capture the footage via FireWire from camcorder to PC
2. Edit the footage (transitions, titles, cuts, etc)
3. Render the movie, outputting first to an mpeg2 format, then back to MiniDV tape as the final product.
For answers to your question on outputting to DVD, check out this link:
www.vcdhelp.com
Good luck,
Boris