Try saving into AVI DivX files using DivX Pro Codec. In the DivX codec config window,choose the unconstrained profile, and set the encoding method into quality-based (only available with the Pro version and profile set to unconstrained). Set the quantizer into 4 (default). And voila, your file will be saved into an AVI file, much MUCH smaller file size, with quality almost lossless!

Set the quantizer larger makes the file size smaller, but lower the movie quality, and vice versa.

The size of the file actually depends on how complex the movie composition and flow. But usually, the file can be 1/10 the original file size!

As for the format to use when u want to re-edit. Try converting your files into AVI DV (AVI file with DV Codec. The codec used for DV Capture, the original format). This is important because first, you will experience slow response using other format than DV, second, your re-converted file will be assured to work flawlessly with PP2.

For all the encoding process, just use VirtualDub. It's free. (The DivX Pro codec is not though)

I hope this helps