Run WoW and Fraps from seperate harddisks. Let fraps save the files at one, and have wow installed on another.

That's the best way. There are ways to create software something bridges on one disk that simulate the same thing or something. But someone else who has experience with that could better explain that. :P

I have two hard disks and I have no quality loss while playing now that I have fraps save the raw files on a seperate harddisk. When I run them both on the same, my fps drops considerably.

Once you have the raw files, use a program such as Sony Vegas (There's many more, I use vegas.) to compile the movie to your preferences. If you upload on youtube or go with streaming, you have to save at lower quality (512Kbit/s max-ish), but if you want good quality, which usually means large files, you can just compile it in a dvd or divx format. Something like 1-2 Mbit/s.

That's what you want to know right? I think the rest is fairly self explanatory. Fraps is pretty easy to use. If you encounter a more specific problem with fraps, just tell us what exactly isn't working, maybe we can help then. :P