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whats the best format for playing on xbox 360

Personally I like h.264 (or x.264) since in general it offers a better quality/compression ratio than others. WMV is also a reasonable possibility but I believe h.264 is much more future proof if your planning on keeping your videos for the long term.
 
WMV with VC-1 compression will offer the best quality and compatibility with the Xbox and Media Center. You can also stream h.264/ac3 mkvs by installing the relevant 64bit codecs on windows 7 (haali media splitter and AC3filter), but features like fast-forward and rewind sometimes don't work quite right.

If you're willing to live with the shortcomings (as they relate to streaming to the xbox), I'd probably go with h.264 compression. As Anteaus mentioned, it's more future proof; in that it's much more widely supported by various devices and software.
 
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