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or video cameras, for that matter, but I won't let that stop me from yammering a bit :)
I think your problem is likely that you've bumped up against the difference between digital and analog mediums. A 640 resolution video is technically more refined than NTSC's 525 scanlines, but the results won't necessarily look better or "as real" as your VHS. Digital is hard-edged, each block in the 640 matrix is well-defined. If the color and intensity captured in a block is distinctly different from its neighbor, you'll see the border between them, hence the jaggy geometric look. Analog is a measure of signal strengths without hard boundaries, and creates softer, more pleasing smears between "points" on the screen. Analog is like a painting done with a brush and can hide lack of resolution with smooth transitions. Digital is like an image made with stamps, if the stamps aren't small enough you'll see them.
You've got all your settings set to high quality. Capture a few test snippets at lesser quality. Fool around with the settings, see if you can't get something that doesn't create hard definitions in the images. Does your camera have NTSC or analog emulation? How about the software? You can get a degree of VHS-like softness post-production with software. It won't be exactly the same and will require some tinkering to get something that doesn't look like a Renoir painting, but maybe it can get close enough for you. Visit digital video sites and search for phrases like "interpolation", "anti-aliasing", and "sub-pixel rendering."
Another thing to think about -- are the videos you're making going to be keepers and do you see an HD television in your near future? In other words, is this the camera you're taking to your kid's graduation or will it be for stuff like filming the cat napping on the mantle? When you have an HD TV in your home, the videos will probably look as harsh as they do blown up on your PC screen (an analog TV itself adds a further step of softening, with its "tri-pixel" colors embedded in a sea of black). If this camera is for weddings, First Bath, communions, and the like, you might want to consider trading up to something with a higher resolution.
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