The full & half size options record at either the full resolution, or half the resolution, of the game you're running.
So if you want to record at 640x480, then you either need to play a game at 640x480 resolution while recording full size, or play at 1280x960 and record at half-size.
This introduces a couple of other issues. Games running at 640x480 usually don't look very good, while recording in Fraps while playing a game at 1280x960 can bring a lot of games to a crawl unless you have a total beast of a system.
What I do with my PC is play the game at a resolution & detail level that looks good, but doesn't tax the system. Then when I run Fraps, I make sure that I can still play the game at a decent framerate (25-30+). That usually gives me the best video quality, and then I can use a video editing tool (even something as simple as Windows Movie Maker) to change the resolution of the final video.
As for the other question, I have yet to get fraps to do anything outside of a game.
