Here's the recipe:
ffmpeg -y -i inputFile.avi -f mp4 -vcodec libx264 -level 30 -s 240x128 -b 200k -bt 768k -bufsize 10000k -maxrate 10000k -g 300 -coder 0 -threads 4 -acodec libfaac -ac 2 -ab 96k outputFile.mp4
This is mostly based on the instructions from the videohelp.com forum.
I have tried 320x240 resolutions, but I decided to scale it down a little to save space since it does not look any worse at 240x128.