http://fcchandler.home.comcast.net/AC3ACM/ -- this is the ACM AC3 wrapper that allows virtualdub to read dolby digital audio streams and process them for you.
on edit:
one more point - I tried variable bit rate encoding a few days back, and although this lets you target a file size better, you have the problem that in very fast movement scenes, the bitrate goes too high for the axim to decode, as it's variable bit rate, which gives better picture quality but, in my experience, many dropped frames.... CBR at 200-275kbps in my experience can be played back on an X3i with very few (usually zero) dropped frames.
one more edit:
I'm using xvid for my PPC versions - koepi's stable from 2002 - xvid-04102002-1.exe.