Yup 3 times compression will suck hard. I always have lossless RGB in fraps by default, I mean, why would you not have this.
Using the lossy format doesn't itself make the videos dark.
I found that with or without 'lossless RGB' checked the final videos would be equally as dark, with the normal fraps lossy (yuvj) format just being a slightly crappier quality. They both use the same colour range though so the common suggestion of 'tick lossless RGB' won't work by itself but it is good practice.
Check the video scope values for 2 clips I recorded in fraps with both formats.
Normal lossy output:
http://i45.tinypic.com/vxf4zt.png
And then Lossless RGB
http://i50.tinypic.com/2mwb4n5.png
Both have the bulk of the black value information starting from zero. Lossy format doesn't make it any darker.
I wasn't clear enough with the pixel format stuff. Vegas only renders 16-235 regardless of the input file, and yes you can colour correct to make it look normal. But if you select 32 bit pixel format you don't need to use correction as vegas will actually render from 0-255 and you don't need to stretch your original video to fit 16-235.
This article was very useful.
http://www.glennchan.info/articles/vegas...8color.htm