A recent article presents a font by Ken Perlin that, as the article claims, is the smallest legible one. Of course, I'm no one to challenge him in his core field -- but, a font I created in 2004 for side messages in a MUD client is smaller:

The same sample provided there in a 320x240 rectangle:

Also, my font is fixed pitch as I needed it to be that rather than proportional, so you can shave quite a bit more. It is also far more legible -- especially when enlarged:

Ken Perlin's
my attempts

As you can see, the former uses sub-pixel rendering, which breaks the moment the image is resized, rotated or shown on a non-LCD screen.

Being a good bit older than when I made this, I'd say that using such tiny fonts put an unnecessary strain on your eyes and thus should be avoided. But if you want to use this -- go ahead, in most jurisdictions bitmap fonts are not copyrightable, and if not:
© 2004 Adam Borowski. You may freely use, modify and/or distribute this font for any purpose whatsoever, with or without a fee.