I was reading on the forum a couple of months ago that there were a lot of problems with the AVC HD format. Have these issues been worked out in the current version of X2?
In a word, no.
Is AVC HD the "preferred" format or is there a format that is more compatible with X2?
AVCHD is certainly 'preferred' by many people who have no idea how demanding it is, and its requirement for at least a decent Core 2 Duo to even play it smoothly. Editing it in a variety of editing packages, including VS, is also a major pain.
HDV (using mini DV tapes or hard disk) on the other hand, has been compatible since VS10+ and is certainly fully compatible with X2. It is "preferred" by the semi-professional and professional end of the spectrum. But it is not demanding of computer resources and easy to edit.
I want to stay on the low end of the price scale.
Generally speaking, HDV cameras using mini DV tapes are at the lower end of the high def price scale. But some of the hard disk ones, particularly the HDV/AVCHD (and .tod) ones are more expensive, and up around the AVCHD price range or even higher..