I read this over at Long Zheng’s blog this morning on how to use MediaCoder to encode properly for the Zune. You will need to download his preset from here to get all the settings optimized for Zune encoding and it is pretty fast too.
The Codec settings Long used are:
Video:
Format: Windows Media
Codec: Windows Media Video 9
Mode: Bitrate-based
Bitrate: 768 Kbps
Resolution: 320×240
Frame rate: 25 fps
Audio:
Encoder: Windows Media Audio
Codec: Windows Media Audio 9.2
Resample: 44100 Hz
Mode: CBR
Bitrate: 192 Kbps
It’s nice. My daughter can now get her favorite YouTube videos, like Potter Puppet Pals onto her Zune. 
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