I use XVID4PSP version 5.0 r90
Best program I've found (and yes it is free) for doing x264 encoding.
Use the iPhone / iPod Touch profile but change the CRF from 21 to 20 and change the audio from 128kbps to 160kbps and play back quality is great and very smooth etc.
This is working on a Huawien Ascend M860 which isn't exactly very powerful.
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