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i cant really see what your talking about, but im going to assume that it simply brings the quality down
editors have to have a specific size and codec to work with, wmm uses what amounts to a DV codec and a resolution much smaller than that your FRAPS footage probably is
thats why the quality is so different
as far as free video editing programs go, nothing can touch imovie. you could edit a wow vid and deliver it in 720p if you wanted.
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