Your not having much luck with this project are you?
I don't know anything about codecs, but you could try looking for a general .avi to .wmv converter (for example have a trawl thro, some of these click here=), and see if that does the job. You could also try here click here.
I am not familar with Fraps (but just had a quick look at the website) - do they not have a forum, where you could post your problem?
I am not sure why you are having a problem with MM2 as according to the FAQ's (click here), you should be able to load the .avi into MM2.