So open your movie in virtual dub and add a resize filter , type your screen size,(128x128, 128x96 etc).
Set the compression, use divx 6 and set the template profile to “portable”, set the bitrate to 256 (you can play with this setting see best results v/s size).

Now set the audio compression to mpeg 3 layer and select 56kb/s , 22500 hz, stereo(this doesn’t reduce much size, keep best audio compression).

Ok now save your new file (save as) and let it work a while.
You’ll get a file 3 times smaller than the original,i reduced 356 mb to 96 mb. This way.

Now when all is done convert to mpx or mtv depending on your player.

I get exactly the same quality in my player. From the old big file v/s the new size reduced one.