JD, you already know what you what to do and you know that WMM isn't for you. I use Sony Vegas 5.0 I run my game at 1360x768. I record at half resolution with fraps. I change the format to WMV format as well as change it from a 1.78 to 2.20 aspect ratio. I'll end up with a 1.78 aspect ratio in my final resolution. No video enlarging or distortion occurrs. I end up re-encoding it to 512x384 (16x9) Check my signature for an example.
Only problem I have is that I'm encoding it too many times in my process, and so in the future I will be able to end up with the same final video size in less steps.