The AVI files produced by Fraps (and CamStudio and a bunch of other programs) aren't fully compatible with Movie Maker. "AVI" is called a wrapper or container. It "holds" both the video clip and the audio file (and, if they are there, subtitle files). It's the codec that actually is used to encode the video clip that matters. If the video that's inside the AVI wrapper is encoded with XviD or DivX, Movie Maker will gag on the video. Convert your Fraps clips to either WMV or to a non-DivX, non-Xvid, non-VC1 AVI file.
The above might cause lagging but the usual cause is insufficient computer muscle and/or too many other programs either running in the background or running at the same time as video editing software and hogging the RAM. A slow (5400 rpm) HD will also interfere with the smooth performance of video editing software. I have a relatively new i7, with a 7200rpm, 750 GB HD and 8 GBs RAM and neither of the Movie Maker versions (6.0 and WLMM) nor the Video Studio Pro X5 I use have so much as blinked while processing or uploading videos.