One final post and I'm done. I just want this information available for anyone else asking the same questions.
On the AVS Forums they had this discussion and PARASITE performed the following test with interesting results:
When I put the pattern on a usb stick and loaded into my xbox and set the reference level to standard and my tv to auto color space "which detects and switches to pc or video dependant on source", it correctly displayed the pattern crushing everything below 16 and over 235. I do want to point out 16 was infact black. Now the interesting results was this. When I set the reference levels to expanded my tv locked into to pc color mode and the ugly truth reared its head. I could clearly see every bar down to zero, BUT 0 WAS NOT BLACK! How could this be? The answer will shock you, but first I need to evaluate my hypothesis. I then took the usb stick with test pattern in hand and stuck it into my TV usb reader "thanks pioneer for a cool feature". First setting my tv to video color space, the pattern clearly crushed everything below 16 like I knew it would. Everything like before above 235 was crushed as well. Now for the shocker. When I set my tv to pc color my fears were then realized. The pattern showed every single strip down to 0 but, 0 was black as midnight unlike before on the 360 were black was dark grey. 255 was also absolute white and every strip below it was clearly slightly less white. THIS IS HOW THIS PATTERN IS SUPPOSED TO LOOK!
What did we learn through all of this? THE 360 SET TO EXPANDED IS NOT MAPPING THE LEVELS CORRECTLY.
That is why people say the pattern looks right on their pc or if they look at the pattern through any other usb device other then the 360. Yes you can use expanded on your tv if it has a pc color mode. However you are probally not getting the best image possible and are most likely losing contrast. When you set the 360 to expanded and use pc color on your television, you can only achieve black by lowering the brightness too far on your display which corrupts the original image. I have confirmed the problem being the 360 mapping errors in color space by using a different device to display the pattern on the same display. By do this I prove the calibration of the display is not the culprit.
I am confident now in saying the best image possible with hdmi for most people is by using reference levels standard. If your tv will display video and pc levels correctly then standard is what you should use. The problem is and always has been the 360. If you set refernce levels to expanded and your tv picture washes out, then your tv is looking for video levels. If your tv shows severe black crush on standard then PC levels is what you use. If your tv can do either standard or reference "sometimes by changing color space in the display" you should use standard because expanded is not mapping the levels correctly and you are losing black and washing out the very low ire. In lamens terms things that are supposed to be black will be gray.
Feel free to duplicate the test I have done.
Cybersoga replied to the test with this:
The conclusion i've come to is that both DVD's and video games on the xbox 360 use the same levels natively - level 16 as black and 235 as white (video levels).
When you set the xbox 360 to RGB expanded and your TV is expecting PC Levels, all it does is it expands level 16 to level 0 and 235 to 255 and re-maps all the levels in between. Both DVDs and video games are affected the same way. <16 and >235 are hard clipped. This looks almost the same as when the xbox 360 is outputting video levels on a TV that's expecting video levels, however you are adding an extra conversion stage which can add banding and other artefacts. Below black and above white data is used by the video processor in the screen to reduce interpolation errors, so the lack of that could also degrade the picture.
The thing is, there's no way to get native PC levels out of the xbox 360 because no matter what you do, the xbox 360 treats 16 as black for both DVDs and Video Games.
So now I am in the agreement that there is no advantage to setting the xbox 360 to output expanded levels. Video levels are native for both DVDs and Video Games. If the TV and can be set to accept video levels that is the best option to have the xbox 360 outputting.
It seems that if you're using a VGA cable then Expanded will work properly by remapping 16 to 0 as 100% black and 235 to 255 as 100% bright white.
However, if you're not using VGA than the Xbox does not seem to remap the range correctly and the image will appear washed out in comparison to Standard reference level. It was also noted that the Xbox's input should not be named PC or anything like it, but should be named anything else to be sure it's not expecting PC input.
While at home over lunch I switched my PS3 to the MGS4 theme (a very textured background of all blacks and greys) and switched to Limited RGB. The difference was astounding. I went from mostly shadows and black areas to a mucn more expansive grey area with a lot of texture. Blacks did not appear as rich and deep, but I have so far writtent hat off as my TV now having incorrect Contrast/Brightness.
Then I tried the Xbox 360. I chose the free Holiday 2008 Premium theme for the dark mountain and snowy pine trees in the background. It started on Expanded and the mountain was very dark and the trees seemed to be shadowed on the top. When I switched to Limited it all changed the same as it had for the PS3. I didn't have a heavily textured image, but the shadows "softened" and the mountain looked much more purplish-blue than dark and shadowed. I then tried various combinations of RGB, 709, Standard and Expanded with the same results.
Again, I assume once I have time tonight to change the settings tonight when the sun sets the image will look less washed out.
Of course, it all really boils down to personal preference.