You can actually do quite sophisticated movie editing in PS CS3 Extended - just select "Animation" from the Window menu.  Its really quite advanced and like a small version of After Effects - you can set keyframes and create motion effects with Photoshop tools.  There is a great tutorial on this at the Kelbytraining.com site by Corey Barker called "Photoshop in Motion".  

H.264 is a great compresion method inside Quicktime - and there lots of others that will do the job as well.