First off, I know EyeBaller has a sticky with this and it's a very good guide, but GaZa asked for this so I thought I might as well knock a quick one together.
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Important!You MUST follow these pre-install steps for Encode360 to function properly. (If you have any of these to strat with, lucky you!)
Install M$ /NET Framework 2.0 -
http://www.microsoft.com/downloads/details.aspx?FamilyID=0856eacb-4362-4b0d-8edd-aab15c5e04f5&displaylang=enInstall Windows Media Player 11 Series -
http://www.microsoft.com/windows/windowsmedia/player/download/default.aspxInstall Windows Media Encoder Series 9 -
http://www.microsoft.com/windows/windowsmedia/forpros/encoder/default.mspxNow you may have luck with your current installed codecs but if your worried i would advise a complete uninstall, system restart and then...
Install K-Lite Codec Pack -
http://www.free-codecs.com/download/K_Lite_Codec_Pack.htm---------------------------------------------------------------------------
Now, get hold of Encode360 from here -
http://dcunningham.net/encode360/(This is a great app, if you like it and use it please donate to support the development!)
Once you've downloaded and extracted Encode360, run it...you will get the following screen:

Now firstly, check your ssettings match what I have above...(Obv. your destination drive can be different...)
Now click on the '+' button in the top right to add your files to be encoded.
Select your files (AVI/MPEG/MPG/VOB) in the dialog box and add them into Encode360, they should appear in the Encoding box:

Now click the 'Advanced Settings' button down in the bottom right...

Now you want exactly the same settings as above...This will ensure that you can directly sync it to your Zune without the Zune software having to re-convert which is what a lot of these guides I've seen seem to leave with.
Note: You can change the 'Mode' if you want, to something like 'CBR-2 pass' or 'VBR' if you feel you want better encoding wuality but to be honest, with the time difference involved, there is a limit to what imperfections you can see on a 4" LCD screen so these settings have worked flawlessly for me so far.
When done, hit ENCODE and wait for however long it will take...and you should have your complete WMV file wherever you specified, ready to be sync'd to your Zune.
Hope it helps.