Gunnerman, the best way (visually, from a filmmaking perspective) would be to take 10-15 second shots from multiple angles. Do the same shot, over and over and over, from different viewpoints. (The ingame flight video is perfect for the playback, then use FRAPS to capture it.)
Then stick the sequence into your video editor of choice. I suggest Pinnacle Studio. Sony Vegas is decent too, but I thought it to be overpriced for the features it offers. Pinnacle makes a decent home user level program. Movie Maker is also an excellent platform, but it lacks a lot of the stuff you'll want later on.
Never keep the same camera shot for more than 8-10 seconds. Your video will really seem boring, trust me.
Video files are HUGE by nature. If you're looking for a tiny file, then you're not going to want to look at video. I do a TON of video editing...you're going to have some big files. lol Consider it a blessing if you're getting 100MB files...mine are in the tens of GIGS.

A tip for making your sim video smoother. Fly the sim at half sim-rate...then put it into your video editor and double it. Seems like such a tiny step, but the difference is astounding.
Good luck!