I just got a new Zune 120, and discovered that the following settings work pretty well for converting/ripping videos for viewing on the Zune 120. These setting may also work on the Zune 80 and earlier because I am not using the h.264 codec.
I am primarily converting Xvid content, but as long as you have the K-lite codec pack, you should be fine with other content — in theory at least 
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(This is for Handbrake 0.9.3)
- Output settings: M4V file, Large file size, web optimized are unchecked.
- Picture Settings: Crop=Automatic, Size=Don’t change, Anamorphic=Strict, Filters unchecked or none.
- Video: Codec=MPEG-4 (FFmpeg), Framerate=Same as source, 2-Pass=unchecked, Target Size=empty, Avg bitrate=1200
- Audio: source=Automatic (unless you know better…), codec=AAC, Mixdown=Stereo, Samplerate=48, Bitrate=160
Now, this works for me, and I have not done extensive testing. Your mileage may vary.
I created a preset that can go in the Handbrake installation directory, in the file “user_presets.xml”.
It looks like:
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<Preset>
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<Level>0</Level>
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<Name>Zune 120</Name>
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<Query> -t 1 -c 1 -f m4v -p -e ffmpeg -b 1200 -a 1 -E faac -B 160 -R 48 -6 stereo -D 1 -v </Query>
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</Preset>
The above would have to be pasted under the root node of the user_presets.xml file along with any other custom presets you may have.
Good luck!
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Update: I have seen some cases where this fails, depending on the specific settings of the file…if anyone figures out some better settings for those cases, so share!