I suggest looking at this guide here.
http://home.quicknet.nl/qn/prive/mjn...irtualdub.html
It's not with Sony Vegas but with adobe Premiere.
The clue however is acctually Virtualdub, a FREE video encoding software! The only stuff you need to do is save the movie from Vegas, UNCOMPRESSED and use virtualdub to encode it. errr... not doing the best explanation here so just follow the guide
Made my 13.5 GB file about 30 MB with the same quality, was about 2 mins long., or something^^
About that black thing on your screen, it's probably resolution problems. Vegas is rendering your video in a preset resolution, which you should change to the resolution that your movie is recorded in! Vegas will stop cutting into your movie and such!
Have fun!