The Cinepak codec was the only one that worked alright for me. But I had to turn the data rate up to 10000+KB/s or the compression was too much (like in your picture). And even so, yes, it does take a long time to render.
Not sure what's causing your problem with FRAPS. Try recording another game to see if it's just Cliffs Of Dover causing the problem. If FRAPS works alright recording something else, maybe try changing some settings in Cliffs of Dover (Fullscreen etc.) to see if it makes a difference.
I'd suggest trying to get the Cinepak codec looking better by upping the data rate though, as exporting an AVI will allow you to turn graphics settings up higher and give better frame-rates than using FRAPS. Exporting AVI's does take a long time, but if possible, you can leave your computer rendering the video overnight if you have to.
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