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Also I don't really find a difference between the three sensitivity options, but I did have to turn the free aim off because it was really making the first group battle in the beginning of the game nearly impossible because my lock on weren't actually locking on. It pretended I was locking on, but my shots fired were going elsewhere. Once I turned free aim off, it was smooth sailing from there (sort of, still have to get used to dual control use)
The real difference between the "sensitivity" options is just how much you need to move the remote to turn. That's really it.
With Basic, in order to turn or look up or down, the cursor needs to "hit" the edge of the screen in order for anything to move. The turning/looking up and down speed is also slower with basic on.
With Standard, you change your view (looking around, up and down) without having to necessarily hit the edges of the screen. However, there is still some lee-way and if you keep the cursor more towards the center of the screen you won't change which way you are facing. The speed of looking around/turning is faster in this setting.
With Advanced, any movement with the Wiimote results in your view changing. Looking around/turning occurs fastest with this setting.
If there is one thing I wish it's that the advanced controls had a small area in the center where you could idle the wiimote without having the view change. That's really the only reason why I keep it on standard right now.
As for Free Aim Lock On it was working as intended =) What happens is, it will lock on your enemies but as you noted your blaster wasn't necessarily "fixed" on the target as it (the blaster) was shooting in other directions. Free Aim Lock On is really just allowing your character to "focus" on a point while you are still able to shoot anywhere. Where as when it is off it returns to the more traditional gameplay of the first two games (you lock on, your blaster focuses on the target no matter what and you can blast it).
One thing I enjoy about Free Aim Lock On is that it makes the game feel more "hectic" and more "real". I have to say the controls really make the Prime series that much better. It's far more satisfying to actually aim and shoot stuff than just lock on and blast away (for me at least).