What is the BEST video format for xbox 360?

I like the MP4 format, but I am not sure how that will work with your dolby, good question and I will try to check it out when I finish my internship (I didn't bring my sound system with me :( ). I would suggest an AVI codec then. I have had good luck with both AVI and MP4, but I haven't checked the dolby surround. I use Handbrake most of the time to do the transcoding. Fantastic question about sound though. I like the MP4 mainly due to size, I can stick quite a bit of movies on my phone for those boring times of the day.