This is known as DivX. DivX uses the same MPEG video compression of the VCD (standard VCD's use MPEG-1. DVD uses MPEG-2) but unlike the standard, it uses compressed audio... in this case MP3.
A standard uncompressed movie formatted for VCD will take up about 1.1 GB of space. Because of this, most VCD movies require 2 disc. With DivX, most movies take up 100-300MB of space. They can easily fit onto a single disc.
DivX is based off the new (well, it's been out for a while, just recently standardized) MPEG-4 standard, in which high quality MPEG-2 video is combined with compressed audio (I'm not sure if it's MP3 or another compression standard). Thus, you have high quality, easily transferrable video files.
Unfortunately, there are no standalone DVD players as of yet that will read a file formatted into DivX. There was only one player that had the capability. It was a Panasonic player sold about a year ago (it sold with a firmware upgrade disc). This was during the time that DivX was completely based on MPEG-4 technology. Because of the licensing and legal issues, it was only on the shelves for 2 weeks.
If you wish to format files into DivX, try VirtualDub. It will allow the conversion. You will also need the DivX codecs. They can be found at
http://www.divx.com.
