360/PS3 Encoding thoughts!!!

Ok here is my dilemma...I have an xbox 360 that I have successfully attached an external 750GB(!!!) Hardrive to via USB. I download whatever media material, anime for example, and generally it comes to me in AVI format, but sometimes OGM or MKV container as well. I have the appropriate converters (Videora xbox converter, AlltoAVI).

So here is the deal: The Xbox360 plays h.264 and MP4 and maybe one other format. It does not recognize AVI like the original xbox, and I actually have not been able to stream AVI from my PC to 360 either..(that's ok, I almost think it's cooler to have my personal library on an external hard drive than worry about streaming from my PC via network). I noticed however, the quality suffers slightly when I convert to MP4. Videora XBox360 Converter will take an .AVI 170 MB anime episode and turn it into a 150 MB MP4 episode that my 360 can play. It is watchable, but on an HDTV the quality is noticeably worse.

Interestingly enough, I attached the external hard drive to my ps3, but when I accessed the drive icon, it said "No Files". However, when I hit the triangle button to get the drives information, it gives me the option "display all files". WOOO HOO! The ps3 was surprisingly also able to play the MP4 converted anime. I didn't noticed that the picture quality was necessarily upscaled, which the PS3 supposedly does for DVD's with one of the newer updates.

Then, I remembered that Videora xbox converter has an option to convert to PS3 formats, which are: AVC 480/720/1080, mpeg2, mpeg4 480/720/1080, flv, MKV (I didn't even need to convert the original downloaded MKV file???!!!), I converted the 170 MB AVI file to the AVC 480 (most all anime is originally 480X640), and instead of shrinking to 150 mb it grew to 190 mb --a size that still wouldn't fill up my 750 GB external hard drive too quickly. Just for shits, I also converter the 170 MB AVI file to AVC 1080, which grew to a whopping 700 MB. There was no noticeable picture difference until you tried to make 4:3 native picture stretch to 16:9, where the 1080 picture retained quality while the 480 picture looked worse, but then again stretching the native 4:3 picture made the subtitles get cut off, plus, my hard drive would fill up too quickly, plus the 4:3 picture was still large enough on my 40 inch LCD HDTV.

So I guess...what is the ideal setup? All the files I download are pretty much MKV or AVI. I am thinking I am leaning towards converting all native 480X640 to AVC 480 with Videora and using my PS3 for media instead of my 360, because of the compression issue with MP4. It's a pain in the butt to do it all over again, but the picture quality really is just too noticeable. The downside is, when the media is in MP4, I can play it on BOTH the 360 and the PS3, but when in AVC, only the PS3, so if my PS3 died and I only had AVC formats I'd be out of luck for awhile. I also thought about taking a cord from my Laptop and plugging it into my HDTV and just playing with windows media player but then it would be a pain to always have to bring my laptop to the TV to watch media....I REALLY like the idea of playing it off my external HD "library". What do you all think?