The software you will need is:
FRAPS - This isn't free, it's $37. It's worth every penny and more. I use it for every video and image I take. It's the only thing you need to purchase.
Virtual Dub (32-bit) - This IS free, make sure you use the 32-bit version. I can't get the 64 version to work. This makes your files a reasonable size.
I'm currently running Windows 7 Home Premium x64 so some of the screenshots may look different. I've done this with the same settings in Windows XP and Vista 32-bit.
The FRAPs purchase, download and install is your average installer so I won't go into that. Once you have it running, check your settings for where you want to save these files. The video files created by FRAPS are HUGE. If you're recording at full size (to achieve HD quality) it's about 5 Gigs for every 3 minutes so have the necessary hard drive space. You won't need to keep these files after encoding.
Next download Virtual Dub. If you have a modern OS like Vista or Win 7, your download will be zipped but will appear just like a folder like below. You need to copy and paste the files to another folder. With an older OS you'll need to use a program to extract the files. My favorite is WinRAR (I use 32-bit version).
Record your videos, they'll create a bunch of AVI files.
Next run VirtualDub.exe and select Video -> Compression. Select XVID MPEG-4 Codec -> OK.
Next go to File -> Open Video File and select your first file. I suggest arranging them by date, earliest first like I show below.
Next select File -> Append AVI Segment and select your next video file. Do this until you have all you want for a single continuous final movie. Note that if you're uploading to Youtube they only accept files up to 10 minutes long. My videos are recorded in full size at 1680 x 1050 which produces about 3, sometimes 4 files combined into a single file 10 minutes long. Update: Youtube now allows 15 minute videos.
If you are only recording one file go to File -> Save as AVI and choose where to save it and what to name it.
So if you're recording into multiple final files you want to setup a batch operation. I usually run all my encodings at bedtime because it does take a while.
Go to File -> Queue Batch Operation -> Save as AVI and choose where to save it and what to name it. I suggest adding a P1, P2, or some other form of identifying it.
Next select File -> Close so you can go to the next video file you're going to make. Select File -> Open video file and go to the beginning of your next video file and repeat the Queue Batch Operation for each video file you want to end up with.
Once you have all your files queued up to be encoded go to File -> Job Control... and select Start. The image below shows a completed set of jobs.
You should end up with video files which are around 600MB to 1GB per 10 minutes if you're going for HD quality and used Full Size in FRAPS options.
Update: Found a great Virtual Dub short guide This in particular was very helpful:
Open the movie and move the slider to the beginning of the portion to delete. Snap to the next key frame by pressing button 4B. Mark the selection start (6A). Advance to the end of the portion desired, and again snap to next or previous key frame by pressing button 4A or 4B. Mark the selection end (6B) and select Delete selection from the Edit menu. Make sure you have selected Direct stream copy under both Audio and Video menus.
(the button numbers are show on a grid in the guide)
I would love to see more people's videos