This will give you an idea of how iTunes organizes your music when you tell it to. I personally like it this way because it's all organized into one place and one "package" on a Mac. Not sure how it does it on Windows, but it keeps everything nicely compartmented.

http://i244.photobucket.com/albums/g...at110709PM.png

Be careful when calling the formats "proprietary". MP4s are not proprietary, they standard video formats. They're much more efficient than some of the other video formats.

I use Handbrake to convert movies. With the settings that I use, most DVDs convert to between 1 and 2 GB for the entire movie.

Do you have a link for Handbrake??

Yup.
HandBrake

As long as iTunes is not set to organize your library, scanning your computer for media will just add entries for each file to the iTunes database. When you add new music outside of iTunes, you can rescan folders to have iTunes pick up the changes, though tag changes outside iTunes can be difficult to get picked up and moving files around will cause iTunes to lose track and have to be fixed, sometimes painfully.

As an organizer, iTunes Doesn't always play well with others.