P-Storm, what formats/applications do you want to use? That will help determine a more specific answer to your question.
If you have not tried it yet,
AutoGK is an excellent, easy tool to produce .avi files with Xvid or Divx video and MP3 audio.
Mobster, you do realize that the steps you outlined put the video through 3 generations of compression before getting to your final format, right? Even with high bitrates, multiple recompressions will degrade picture quality, especially with 2 passes through an interframe codec like Divx.
The optimal editing pipeline would be capture->edit->compress to final version. Most video apps should be able to open and edit Fraps .avi files, perform edits, then export to Divx. If you really need to reclaim disk space from the huge Fraps files, you can cut them down in Vdub using Direct Stream Copy without recompression, or you can compress them to a better intermediate codec that uses intraframe compression. There are also frameserving options available in Vdub or AviSynth that can get video into applications that don't natively place nice with your videos.
I don't mean this to sound like a lecture, just trying to offer tips.
Perhaps Ibrin can post the specs, formats, and filesize requirements for WSGF videos so that we can deliver final versions directly to him.