I use Pinnacle Studio and capture it as an AVI file. It takes up the most hard drive space, but it's the highest quality you can get from a capture. You'll use up about 13 GB per hour... 215 MB per minute...
After you capture your video, you can edit your video, make menus and chapters, etc. Then you must render your project. This is the encoding step. It takes your movie and compresses it as MPEG2 for the DVD.
Bottom line... capture video as AVI and you'll have the best quality.
What camcorder and software do you use?