I use a JVC GR-DV500US miniDV cam. It's a very low-end camera, MSRP is $800 but I got it for a $450. The quality is amazing, especially under relatively low light. High contrast lighting looks pretty crappy though. Here's a video clip (DivX) to show the quality under various conditions.

As for software, I use SCLive for capturing via Firewire, Adobe Premeire for editing, and VirtualDUB and TMPGEnc for encoding to Divx and MPEG1/2.