Thwarted attempt to work with many hours of video

I'd like to draw clips from about 25 twenty-minute videos to create a single movie that's about 30 minutes long. Premiere Elements crashes when I try to put all of these videos into a single project. To deal with this, I had the idea of combining and drastically cutting about five videos, then saving them as a single .avi file, and then opening a new project that uses that .avi file and five additional videos from the original set. I would again make drastic cuts and save a second .avi file with all of the material combined. I thought by repeating this process several times--adding three to five files each time--I would eventually incorporate everything and avoid the crashing.
I took the first five videos, cut tons of stuff out of them, and then saved them as an .avi file. I started a new project and imported this .avi file and a new set of  original videos. Premiere did not crash, so I thought this was going to work pretty well. However, when I went to save the second project as an .avi file, I was told that I was out of hard drive space--even on my external hard drive. I started investigating and, to my surprise, I found that my first .avi file was four times larger than the combined size of the original video clips! It was eating up tons of space and apparently the new .avi file wanted even more.
So, my brilliant idea is not going to work. Are .avi files always this big even though they are much shorter than the original .vob files? Why? Can I save the final projects in some other format that is more efficient with space and can be imported into later projects? Is there another, better solution to my original problem--too many long video clips for a single project?
Also while investigating the hard-drive space problem, I came across tons of rendered files. Many of them appear to be linked to the same project. Reading online, I learned that I should delete those through PRE and not through Windows. It also appears like it's an all or nothing proposition. I can't just delete the old versions?
In general, how does one do hard drive space efficiently in PRE?
Thanks for any help.

It sounds like your book will be helpful about how to best use space, Steve. I've ordered it. In the meantime, here are the answers to your questions. What is the best way for me to work with lots of long video files at once? Should I even be trying to reduce the original videos into smaller pieces?
Steve asks:
What kind of camcorder is your original video coming from and how did you get it into your computer?
   They were old Hi-8 tapes. I burned them onto DVDs, which created .vob files.
What settings did you select when you started your Premiere Elements project(s)?
   I did not change the original settings. How should I set them?
When you started each project, did you save it in a separate sub-folder on your external drive, as I recommend in my book?
   No. I move projects to the external hard drive as I complete them (after saving as movies to DVDs). I do this because I work on
   a laptop and do not consistently have access to my external hard drive. From your question, I’m guessing this is not a good
   approach. (Your book has been ordered).
Is your original video from a DVD? VOB files from a DVD are generally about 1/5 the size of DV-AVIs. I would also not recommend using them as your source video files if you can avoid it.
   Yes. No good way of getting around this as the original format, given the age of the source material and my limited access to
   conversion equipment.
Is your external drive formatted NTFS or FAT32 (as they come from the factory)? FAT32 drives have a file size limation that can often choke video editing work.
   Just checked and it is FAT32. Bummer. I assume reformatting it now would erase everything on it?
Bill asks:
Can you tell us about your system's entire I/O, i.e. all of your HDD's, and how you have them allocated?
   I use an HP laptop running Windows XP. The processor is P8600 @2.40 GHz. I have 3 GB of RAM (weird, I know). My internal
   hard drive is 150 GB, NTFS formatted. I have one external hard drive. It is 600 GB, FAT32 formatted. I’m not certain of the
   connection format, but I would guess it is USB2 since it is plugged into a USB port with the cord it came with.
Thanks again!

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