Adobe Premiere Elements Question

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Ok so here is my problem. I have Adobe Premiere Elements and im making quick little vids of stuff me and a friend make in a Gmod ( A game btw). I use fraps to record and it records at a very nice quality. 500 megs for about a minute of video. So put it in Elements and I add a tittle and tell it to encode at 320X240 Mpeg 2. Now the video that comes out is super pixelated. Now I understand there is going to be some loss is quality but this is ridiculous. What should I be encoding in to make about a 100 meg file for about 3 minutes of video.

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