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.