Hey dada77,
yeah no problem, there should be a large selection available from memory, maybe try a search for free video editing, see what shows.
If terms of best, often adobe or sony vegas is mentioned. However there are lots of options.
A free program for windows is Windows Movie Maker, often bundled with winXp.
http://www.microsoft.com/windowsxp/using/moviemaker/default.mspx
Here is some links to others, I have not tested these, however look to be free.
http://www.zs4.net/,
http://jahshaka.org/
this one looks to work on a simple timeline, and has a 30day trial.
http://www.deskshare.com/vem.aspx
The programs I use are,
Adobe Premiere
Arksoft Showbiz
Dazzle / Fast.
Roxio / Sonic
Media Forge
and some other plugins.
Premiere will cost some coin, yet a great program.
Though the video editing card I purchased cost me around 2,500.
And to answer your last question.
Well I would say Mpeg, yet it would depend of if the player of the game has the correct codecs, this has to be tested further. So as far as efficiant format, I would say AVI as it would be more in use.
There would be pros and cons to both.