What model of camcorder is your video coming from and what resolution is your video?
Version 3 was a very early version of the program and will not work with most modern video formats, including AVCHD.
In fact, the only high-def video it was capable of editing was tape-based HDV captured over a FireWire connection.
Please let us know if the too large message was generated by video or still image import try?
This sounds like a classical still image situation wherein Premiere Elements blocks the import of the still image with a total pixel count exceeding its limit.
You see this in all Premiere Elements which operate as 32 bit applications. You escape this after Premiere Elements 9.0/9.0.1, when Premiere Elements 10 and later are running on a 64 bit computer.
I wrote about this in detail for Premiere Elements 8.0/8.0.1. Those details likely apply to your situation if you are trying to import still images.
Please refer to post 6 in the following older thread
Is your new camera allowing you to record higher resolution photos than before?
Please consider, and give more details.