Have you watched the raw avi file that was transfered to your computer via firewire? If that looks good then the problem is in the encoding (turning the AVI file into MPEG 2, which is used in DVD video.
There are several stages video goes through from camcorder to DVD. Here are the basics.
(1) Transfer the video to PC via firewire.
(2 - optional) cut/edit the video (the AVI file created in step (1).
(3) Encode to MPEG 2 (for DVDs)
(4) Author the DVD for burning onto a DVD
(5) Burn the resulting files onto DVD.
My guess is that if your video looks good in raw avi form, then the encoding to MPEG 2 is the problem. MPEG 2 is a lossy compression. You may be able to get better results using a different program to encode the video to MPEG 2 (TMPEGplus is one that seems to be popular).
Pinnacle (probably bundled with the camcorder) is a sort of all-in-one-easy-to-use program, but sacrafices control and quality in the process.
Using seperate tools increases control and the posiblity of better results, but also has an increased learning curve.
Some things you can do to improve quality
(1) Use a Tripod! At the very least, use two hands, and brace your arms/camera against something solid.
(2) Make sure the area is well lighted. DV on consumer camcorders often looks very bad in dark situations.
(3) Get to know your Camcorder, mabey learn a bit about lighting, and manual settings. How light affects exposure (shutter speed, apeture, etc). Knowing a few basic concepts can go a long way!
Good Luck!
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Some people say dog is mans best friend. I say that man is dog's best slave... At least that is what my dogs think.
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You might try this:
1.Capture with DVIO or WinDV.
2.Use TMPGEnc DVD Author or WinAVI Video Converter to convert,author and burn.
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