I am not sure whether this has been discussed before or not (searched and found nothing), but here is a way to circumvent SMC requirement for Fuze connection during conversion. I am using Vista Home Premium with all the latest system update plus my Fuze (8GB, v1, latest firmware) is set to MTP mode. I can’t be sure how well this will go with different Windows system and Fuze models, you just have to try it out with your own risk.
What you need for this to work: a Fuze, an USB removable storage with considerable large capacity (i.e. USB thumb drive, or any USB memory card reader + memory card. 2GB and above recommended, obviously depends on how big the files you want to convert to), and of course the latest SMC software. In my own experiment, I have tried both a Transcend 2GB USB thumb drive and a Sandisk 256MB CF card + built-in memory card reader on Dell XPS420 with out any problem.
What you want to do: Connect both your Fuze and the thumb drive / memory card + read to your PC, than fire up SMC (if your Fuze are in MSC mode, I’ll suggest removing the MicroSD card in it before connection). SMC will show both Fuze and the removable memory you just plugged in as Fuze’s external memory (*check to be sure), select the external memory now. Find the video(s) you want to convert, *make sure the external memory is large enough to store the converted files (remember that SMC will bloat the video size in the end). Click the convert button and wait for the conversion to start. Once the conversion begins, disconnect your Fuze. SMC will continue to convert the videos and store them into the external memory (i.e. thumb drive). Meanwhile you can start using your Fuze for music while waiting. Once the conversion finished, you can copy the converted videos into your PC for storage and drag and drop to Fuze’s video folder when you want to watch it.
So far I have converted two full size movie and a few Youtube videos without any problem. Enjoy.