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There are a number of free programs that will do it. I've seen threads about them on other Droid fora. I've used Super from eRightSoft.com to change formats of files (though not specifically for viewing on the Droid). Handbrake is another one I've seen recommended, but never used.
I use handbrake. Using the Ipod Legacy setting will get them in a playable format for the droid (encode with x264 in an mp4 container). However, under the 'Video' tab change the setting to constant quality. It's a better setup. Leaving it on an RF of 20 will look excellent. If you think an RF of 20 is not good enough (rolls eyes), then do not go lower than 18.