Free linear editor (to extract clips):
VirtualDub (avi, divx, xvid, etc) and VirtualDubMPEG-2 (mpeg, including DVDs' .vob files) are outstanding open source linear editors that render to avi only. Very good for selecting clips quickly from large files. To keep files sizes small use "Direct Stream Copy" from "Video" on the toolbar, but you can experience audio sync problems (if you are using music / separate audio, then no problem).
If you want clips with .mp4 related files, you may want to try AVIdemux 2.4 GTK+. Extracting from that compression can be a pain though.
Retail linear editor:
VideoRedo (for mpeg / DVDs vob files). You can't go wrong with it. Handy and it renders to native mpeg.
Commercial Non-Linear Editor (has timeline - seperate audio / video tracks):
Adobe Premiere Elements
I have tried a number of editors and this one is the best, imho. The latest is PE4 and runs about $80, but some shopping will probably find it cheaper. A bundle with Photoshop Elements will save you money on both. PE is a well regarded editor that provides multiple video and audio tracks which enable the ability to create some really good video.
The first selling point for me for this editor is that it is very stable and thusly very difficult to crash. I regularly used Pinnacle's Studio before getting PE and found myself constantly saving the project to avoid losing work. Depending on your machine that may not be a factor, but I still am using my old 2.5ghz P4 with only a gig of ram.
This editor has many bells and whistles (transitions / effects), but even if that is not needed, it's stability, multiple video / audio tracks, ability to render to DVD and cost offer substantial advantages. Some NLEs priced below $100 are not actually full versions and they will want to sell you more features. PE's price includes everything. It is simple to use out of the box, but offers enough features that I still discover things after a couple of years use.
I use an older version, PE2 and I would not be surprised if a used copy isn't available at Amazon or somewhere for $10 - $20. I'm perfectly content with my version and the only feature of the newer version that I can think of is the ability to render to flash and import to youtube, etc.
If you do chose to buy a non-linear editor, it will be in your best interest to create a scratch disc and direct your editor to use it. In short, a scratch disc is free and contiguous space on a hard drive other than the one that the editor is installed to. This will entail probably at least 60 gigs of space. Ideally a SATA or IDE slave drive with at least that much unused space that is regularly defragged would work. A separate partition for this is not necessary. If you want to try an external drive, I would only recommend one connected via SATA. A scratch disc will go a long way in expediting any rendering regardless of your machines specs. An abundance of RAM is a must.
Other free tools:
Audacity
Excellent, free and open source audio editor. I use it regularly to customize a "mix" to meet the timing of the video that I have.
The GIMP
Again...free. Again...open source. Very nice photo editor that mimics a full version of Photoshop.
Photostory 3 for Windows
A free offering from Microsoft after validating your version of XP (I have no idea if this is available for Vista). This software creates pan and zoom video from still images (aka the Ken Burns effect). Easy to use and it can bring drama to otherwise plain still images.
Process Explorer (CPU) and CachemanXP (RAM)
Two XP utilities that are very handy for those with limited resources, particularly non-hyperthreaded or non-dual core machines. Both offer easy to realize graphical displays in the system tray. Both are free. Process Explorer can also immediately terminate a process / application which can be useful (although it is an immediate termination, it will not save).
