You are getting that message because you are exceeding a total pixel count limit of the program.
This is explained in this older thread which was then discussing the matter in Premiere Elements 8.0/8.0.1.
Please see my post numbered 6 in that thread
The answer to your present situation is to reduce the total pixel count of your images which is triggering the
too big messages. You are going to see this type of thing in the version of Premiere Elements that are running
as 32 bit applications and Premiere Elements 7 is one of them.
Please let me know if you have questions or need clarification on the above.