you could convert this to 720p xvid plop it into an AVI while keeping the AC3 sound.
i do all that kinda stuff in avidemux on linux (and there is a windows version) - it uses ffmpeg libraries for decoding so it supports a wide range of input.
add the AVCHD m2ts file, change video codec to XviD, add a resize to 720p filter and encode at Q2 and you'll have a great looking AVI playable on xbox360 and ps3 - will probably be ~2GB.