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Wow, that's a hard one there. The specs are already low. Have you tried putting those files on the Axim, and if so are you happy with the quality? I would suggest using TCPMP, plus if that's the format, you can never re-encode the video to be better quality than that.
If you wanted, you could encode using the same specs, don't know if it would necessarily be smaller in .avi, but you might want to try.
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