Your Method is pretty good, even if you partly take an a bit odd route
I’d take the subdivide tool and set it to 20 subdivisions, for instance. In this case, that’s better than the knife tool
Then, it’s interesting to see the falloffs you chose. Those are pretty much the oddest and least useful of the bunch.
Ok, random is great for quick mountains but constant isn’t really useful, except maybe you do cliffs or something…
What you said to be an alternative to subsurf: set smooth…
All it does is interpolating the normals over the surface, faking a continuous, smooth mesh and thus smoothing the shading aswell. - You’ll most likely use that in the game engine aswell.
Subsurf on the other hand adds actual geometry. It splits every single face into four and smooths out the mesh on the fly (if you use catmul interpolation, that is)
Every subdivision multiplies your facecount by four.
The shader isn’t actually smooth (unless you checked smooth shading as well): If you zoom in close, you’ll still see the single quads’ borders (which is not the case with smooth shading)
An other way to do it but probably with way less control, is using a displacement texture. you can especially use it to add some details.
For instance, your final mountain there has quite a high polycount (as you stated yourself). If you add a displacement modifier under the subdiv one, you can use the additional geometry and dsplace it again, to add a little bit of variation. (Just play with the strenghts and you probably’ll want to use a cloud texture or something like that)
One more thing you can do: Sculpt. In Sculpt Mode you have control over the mesh as if it was clay. (Especially with newer versions)
And as you want this for a game, you should learn how to bake a highpoly mesh’s normals to a lowpoly mesh one. That’s not too hard, there are tons of tutorials featuring it, either as a main subject or on the way through the tutorials.
It’s the texture backing stuff
(First thing I found when I quickly searched a tutorial for baking: http://vimeo.com/2936073 - conveniently, he also shows how to do subdivide multi, aswell as the sculpt mode and a couple of other things ;))
Sculpting and baking:
http://www.blendercookie.com/2010/07/15/a-stylized-dragon-part-5/ + http://www.blendercookie.com/2010/07/20/a-stylized-dragon-part-6/