What is a good workflow for producing High quality High definition Videos suitable for a final upload to the internet. I'm entering my third week into the video editing world, and have already put up a few test videos to youtube. But overall, I am unhappy with the results so far.

Quick background: I am recording video game footage using fraps, and eventually want to create professionally edited productions in the future, for now, I'm still learning.
I have tried h.264 from vegas studio 11(trial)... it looks terrible. I have also tried wmv: that looks much better... but is grainy, so still unacceptable for me (also file size is large in wmv).
And for the last week and a half, I have been playing around, googling, testing programs, researching methods for video production, trying not to ask questions(because the info might already be out there), but I just can't seem to figure this out: I'm stuck.

What information I need:

I would like to know what steps I need to go through in order to end up with a high quality, high definition video with accurate colours(within acceptable parameters of course... i.e. not super dark compared to source video, which is what happens with vegas avc/h.264).

I think I have some idea as to the steps involved, and I will post it below, please fill in the gaps with as much detail as you care to provide, post links to other answers, and also other websites which have supplementary information:

1.Record Video in fraps at 1080p - 29.97fps
2.Encode into intermediate codec (having trouble here, one spot I need help with).
3.Import into video editor (I'm currently trying to use avid studio due to it's unlimited track nature, if vegas studio 11 is better for me, please say so).
4.Edit the video, adding effects and transitions and splicing together video footage.
5.Export the video to h.264 at about 8000kbps or to another much higher bitrate codec.
optional 6. encode into final codec using handbrake or some other encoder.
7. Upload.

So that's what I think the steps are, please correct me if I have them wrong. As you can see, I am stuck at step 2, because I keep getting no video footage after encoding into my intermediate format. 
     The intermediate codecs I have tried are: ffmpeg huffyuv, ffmpeg dnxhd and they both get no video output.

If anyone is still wondering what question to answer, I'll abridge it here:
What do I need to do and what programs should I use (max budget $150 total), in order to get a VERY GOOD quality video with fast editing speeds.

Note: I may not have the correct playback codecs, I don't know, I only have the default windows codecs installed at the moment for decoding, the rest are included in ffmpeg.
note2: I am using avantigui to use ffmpeg.
In video, there is no "I don't have disk space" or "I want to add compression to files to lower my disk space usage and caching".

You should record uncompressed, work uncompressed, and at the final stage export the uncompressed video to a suitable format for delivery.

Record your video.  Edit wherever you want (I suggest Vegas, because is the fastest on pc).  Cut.  Edit.  Do whatever you want.  Then export your timeline to h.264.

I suggest using Adobe media encoder cs5 + to do the job.  Don't encode already encoded video files, because it will degrade your quality.

Check youtube/vimeo/... what formats they play the best (usually there is a guide for file formats and upload)

One more thing:  FRAPS ENCODES in its own codec.  You need a properly installed DECODER/ENCODER for Vegas/Avid/Premiere to see the files properly.

I did a lot of gaming videos before and after HD was introduced.  I did it with FRAPS, game engines....  Uncompressed is what you want.  Or you could force FRAPS to use Avid's DNxHD code c(you can get it on Avid's site.)