I get it now. I tried a file in 208 x 160 format, and it does what you said. Play in full screen always option doesn't help.
If you want to blow up a clip, it has to be re-sampled, and it's going to look like hell.
I use Virtual Dub for mpg to avi, and Windows media encoder for wmv. Better if you can start with a big format and shrink it down.
Much info
here