Stand-alone episodes with an underlying plot connecting them is the best method, in my opinion. Avatar, Xiaolin Showdown, AmDrag, Code Lyoko, Ben 10, Yu-Gi-Oh GX, Justice League Unlimited, Kim Possible, Pokemon, and various other shows follow the formula.
My main problem with season-wide arcs is it leaves little to anything else. You can't just stop in the middle of a batch of episodes of, say, someone infiltrating a castle and have them do anything else without it coming off as "Why did they stop?"
Episodic format just allows for more flexible adventures/situations and you can actually sit down and watch a random episode and enjoy it. If you sit down in the middle of, say, Part 2 of the City at War storyline for the Teenage Mutant Nnja Turtles, you're kind of obligated to watch the first part and last part to appreciate it all. TMNT is forgivable, though, since it's only 3 or 4 episode arcs which is less time than your average movie, but shows with upwards of 20 - 100 episode arcs (mainly the Japanese long-running shounen shows, or season-length shows such as 24) then it makes it hard to go back and rewatch anything since you basically have to rewatch a huge batch of episodes. Let alone half the time they just drag things out for no reason other than to waste time or to fill an episode quota.