For rendering I'd suggest checking out this tutorial:
http://www.warcraftmovies.com/articleview.php?id=21
That should give you fairly good quality results.
As for the widescreen effect.. Not positive on that. In my not-so-professional opinion I'd say try rendering at a resolution that is wider than it is in height, or you could apply a pan/crop to all the clips, but that that would end up with the upper or lower portions of the screen cut off.
And the reason fraps is recording at 640x512 I'd imagine is because it's set to record half-size. Open the fraps options, go to the movies tab, and make sure "Full-size" is selected.