The Zune plays H264 and mpeg4 vids. Both formats can be created by clonedvdmobile, you just have to adjust the profiles in the devices.ini file.
Correction: the Zune software converts H264 to WMV, then you can watch it on the Zune. Don't understand why the Zune doesn't play Microsoft's own "PlayForSure" media formats. They should rename it to "PlayForSureButNotForSureOnTheZune" media... but that's DRM (Destroy Rights Movement)...
Yeah, as you pointed out, it won't play h.264 natively. CloneDVD Mobile really needs direct WMV support...