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First, you need to ensure that your photos are no larger than 1000x750 pixels in size. The JPEGs coming from your camera are far too large.
Second, the video from your Canon Powershot is likely MJPEG-AVI, a format that does not edit well in Premiere Elements. MJPEGs also tend to create poor quality video outputs.
Finally, as I point out in my book, Premiere Elements 11 will set up your project automatically -- but the project set-up will be based on the first clip on your timeline. Is that first clip a video clip or a photo? Ideally, it should be video from your Canon Rebel so that it triggers the program to use the correct project settings.
If that's not possible, you can force settings on your project. But, if your project settings don't match the specs of the video from your Rebel (which I assume you shot in full 1080 HD), your project isn't going to work right.
Are you editing in Quick or Expert view? If in Quick view, switch over to Expert. That way you can see when your timeline needs to be rendered. (There will be a yellow/orange line above certain clips.) Render often (by pressing the Enter key on your keyboard) and you'll see a lot more stability and better performance all around.
You've definitely got the hardware to edit hi-def video. But you need to ensure your workflow is set up to match your source material.
Meantime, manually go to Windows Update and ensure you have every update, even the non-critical ones (which don't update automatically). Also make sure you've got the latest version of Quicktime and run Disk Cleanup and Defragmenter regularly.
You might also want to check out my free 8 part Basic Training tutorials. They'll help you with the basics.
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Along with the points in Steve's Reply # 1 (especially the pixel x pixel size of Still Images), see this article on partitioned HDD's and video editing: http://forums.adobe.com/message/3774098#3774098
For MJPEG, see this article: http://forums.adobe.com/message/4079377#4079377
Thank you for your in-depth points. The photo size is a missed issue and I have to revise it crefully. The poroject setup matching with the rebel video is another point missed completely. Yes I was editing in the expert mode. Rendering was done regularly but had not much affected the smoothness of the workflow which remained difficult even after rendering. I will certainly review your tutorials. I hope I will be able to setup the project correctly. Thank you.
Thanks a lot. Will report the update of my project situation.
Off topic.. But why exactly are you not using a 64-bit OS? Your machine is perfect for it. With 32-bit, it really does not matter how much RAM you have if it is more than 4 GB That is a theoritical 3GB Max for a process, and I have rarely seen it go above 2 GB per process. That's shaving off two-thirds of available memory because it is not optimum!
With 64-bit, you should have lesser issues. I am not saying for a moment that it will solve all your problems or you do not need to do what the experts have told you thus far. But just something to maybe make a better editing experience with the available memory, of which you have enough, to guarantee a smooth experience with Premiere Elements.
Just a thought.
Thanks VDOSurfer. Why am I not using 64-bit OS? The answer is that there is no specific reason not to use it except that 32-bit OS came with the machine. Nevertheless, till few weeks ago I was not aware with RAM size-OS limiting relationship. And being now aware that 32 bit OS is severely limited regarding the RAM issue I am seriously considering to upgrade to 64 bit OS. It is convincing that freeing up the RAM to say 12 or more GB will revive the workflow of the Premeire Elements. I will do it. Thanks.