It's possible to do this with Premiere Elements -- but I sure wouldn't recommend it. Especially not version 8, which tended to do this type of thing very inefficiently.
FRAPS and other screen capturing software generally does not play well with Premiere Elements. But adding those high-end Picutre-in-Picture effects would likely be way too much for the program to handle with that format of video.
If it were me, I'd very much look at another software option for your editing.
Welcome to the forum.
The "black bars" indicate that there is a mis-match between the Source Footage (a video screen-capture program, in your case), and the Project Preset. However, due to the nature of your Source Footage, there is little that you can do, in PrElements, because its Presets are for conventional Video, from a Video camera, and there are but a few possible Frame Sizes available. PrPro, PrE's "big brother," allows one to create Custom Presets to match the footage, but PrE does not have that capability.
As you are doing a capture from your computer's monitor, the likelihood of the pixel x pixel dimensions matchiing conventional video is very, very slim. There will likely be either black bars, or if one were to Scale up their footage to get rid of them, something will be cropped off of the screen. It is an "either/or" situation.
For some general tips on working with FRAPS, Camtasia, CamStudio, etc. footage, see this ARTICLE. Note: many of the tips are for PrPro ONLY.
Good luck, but if you need 100% of your screen-cap Frame, with no black bars, then you will want to use another program. PrPro can do what you want, but it is not an inexpensive program. Camtasia, a video screen-cap program, also has some video-editing capabilities, and might work better for you.
I'd be inclined to post a question on the youtube page asking what software that author used to prepare the tutorial.
Insanity is hereditary, you get it from your children
Also, if you can get past the Aspect Ratio difference between your monitor and the Project Preset, then that part at 00;00;44;00 is pretty simple in PrE - it is just PiP (Picture in Picture), and at least one appears to have been Keyframed with the Fixed Effects>Motion>Position and Motion>Scale.
PS - let's say that you do get your FRAPS footage into PrE, and wish to do the PiP, this ARTICLE might be useful for helping set up both Position and Scale. At about the half-way point, I show how to use alignment grids for custom PiP work.
Thank you all for your help. I didn't use FRAPs to record my gameplay footage, I used an EasyCap to record from my game consoles. The frame size is the project files is the same size as in the video files 720px width 480px height at 16x9 aspect ratio.
You're likely going to have the same issue.
Those codecs don't play well with Premiere Elements.
>used an EasyCap to record from my game consoles
What CODEC is used by that program?
Read Bill Hunt on a file type as WRAPPER http://forums.adobe.com/thread/440037
What is a CODEC... a Primer http://forums.adobe.com/thread/546811
What CODEC is INSIDE that file? http://forums.adobe.com/thread/440037
Report back with the codec details of your file, use the programs below... a screen shot works well to SHOW people what you are doing
If you have a red line over the timeline after importing a video and before adding any effects... your project is wrong for your video... read above about codecs
Once you know exactly what it is you are editing, report back with that information... and your project setting, and if there is a red line above the video in the timeline, which indicates a mismatch between video and project
H.264 will NOT work inside an AVI wrapper http://forums.adobe.com/thread/854115
More information needed for someone to help... click these links and provided the requested information