If you want to edit your footage, do it before converting so that you get the best quality possible. For that, use Virtual Dub, its free. If you have other editing programs like Adobe Premiere or Sony Vegas, you can use those too.

Handbrake is for compressing/converting the files once you are done. It's also a free program and has not failed me.

So basically, your workflow would be:

1. Fraps (record)
2. Edit Footage (Premiere, VirtualDub, Sony Vegas etc)
3. Compress source files (Handbrake)

Note: Depending on your preferences, you can also just decide to keep the edited video you made and not keep the source files around. Or if you want to keep your source files, use Handbrake