I thnk it does use a fast lossless codec to cut down the filesize slightly, but I can't be sure of that.
Apart from a fast CPU you'll need to have somewhere you can save the data. It's a lot of data, so the best way I have found is to use another pc on my network as the target for the output video. I have a fast 1Gbit LAN between the two machines I use for this, and the target machine also has a RAID0 array so it can write to disk at about 90Megabytes/sec. Doing it this way might seem complicated, but it stops the machine you are running
BF2 and FRAPS on having to write to the local hardrive while its running.
The upshot of this is I can record from fraps at about 25-30fps if keep the output video down to about 640*400.