From the Zunerama blog:
You may have seen several blog stories today about Wal-Mart selling a Zune that had apparently been used and returned, and had some very naughty video on it.
Either Wal-Mart got sloppy or they just didn't know how to erase all content before trying to resell a returned player!
So, as a public service to Wal-Mart, other retailers, and the common Zuner everywhere, we describe below how to delete everything from your Zune player.
With your Zune attached to a computer, it's easy:
# Start Zune software and connect your Zune to the PC.
# From the Options menu, choose Sync, your device name, and then click Erase Zune Device.
# Click OK after seeing the "are you sure" prompt.
# All content on the player will be erased.
To erase all Zune content without using a computer:
# Press and hold the Back button while pressing "up" on the control pad.
# The Zune will start to reset. Immediately press and hold the Back button and at the same time press "right" on the control pad and the OK button in the center of the Control Pad. Hold these buttons until your Zune device restarts and you receive the message "Clearing contents. Please wait."
# When the Home screen appears, the erase is complete, and you can again use the Zune device.
With either of these methods, you will lose the pre-loaded content on your Zune. Any other content you have in your PC library will re-sync the next time you connect your Zune.