Whenever proxy editing is discussed here, reference always seems to be made to an FAQ outlining a method which doesn't really involve proper proxy files. So I've devised a very simple method whereby actual proxy files are used for editing, then for the final render the real files are substituted. I don't know whether I've simply not found a previous mention here of such a method, or whether my suggestion is actually original, but in case I've indeed come up with something new, I'll outline how it can be done. And if it's old hat, please ignore!
My reason for needing a proxy files method is that here at least, my quad core XP PC does not like using 720p files from my Panasonic GH1 in Premiere Elements 7. It goes very slow and tends to hang when simply putting the clips on the timeline. It's not too bad with full HD AVCHD, but even so it's obvious (and well known) that such footage adds a big load to the system. Perhaps in the next version Adobe will add 'Cuda' support so that some of the load can be handled by the Nvidia card, but meanwhile, working with AVCHD can become a problem even on a reasonably powerful system if the project is complex.
So the idea is that I want to use lower-resolution mpeg2 files for the editing, and then use the real AVCHD files just for the final output.
I have to admit that to use this method, you need to use a third party program to create the proxy files in the first place. There is at least one freeware AVCHD > MPEG2 program "Free AVCHD Converter" at http://www.koyotesoft.com/indexEn.html which seems to be ok but a bit slow. Elecard also do AVCHD conversion software, and several other programs are available - personally I've found that Cyberlink's MediaShow Espresso does a very fast job on a system with Nvidia Cuda, and it's very simple to use. Whatever software you use, it has to be able to take the batch of files you want to work with and convert them to files in the desired format with the same name but a different extension. Using MediaShow, for instance, to convert the AVCHD files here, the source files are named (by the camera) 00000.MTS, 00001.MTS, 00002.MTS etc, and the converted versions are call 00000.mpg, 00001.mpg, 00002.mpg and so on. Remember that you won't be using the transcoded files for final output, so if their quality is a bit reduced it doesn't matter.
1 - Using the third party software, create proxy versions of your original. The converted files should be in a format the PE7 can handle (of course) and which will not impose a big processing load on your PC, while providing adequate quality when you are editing. Here, 720x576 mpeg2 16:9 is a good compromise between appearance and performance.
2 - Now start up Premiere Elements, and choose a project preset which would be what you would use with the normal files, not the proxy files. Import the proxy files, not the real ones, and edit in the usual way.
3 - When you've finished editing, save the project in the usual way and exit.
Now you need to replace the proxy files in the project file with the real ones in order to output the completed project.
4 - Open the .prel file for your project using the windows "Notepad" program (or even better, a program like "Notepad++" which is a more powerful freeware alternative that will do the replacement much quicker if the project is complex).
5 - Using the "Replace" function in Notepad (or alternative software) replace the extension of the proxy files with the extension of the real files. In my case I'd be replacing .mpg with .MTS so that the project will use the original AVCHD files. Now save and exit (it would be prudent to use "save as" so that you are not over-writing your edited project in case something is amiss).
6 - Then open the de-proxied project, and use "share" to output as required in the usual way. Here I find that some kind of preliminary processing tends to happen before you see much movement of the progress bar - probably PE7 is having to redo some stuff that it did with the proxy files now that it "sees" the real files in the project. This is a situation where the freeware utility "Bmem" - http://badmofo.org/bmem/ - is very handy because it shows you that something's going on, and it takes up very little space on screen. I have it running all the time and couldn't live without it!
This procedure has been tested a couple of times on my system with fairly simple test projects and seems to work. Your Mileage May Vary - I would strongly suggest you try it first on a test project before you commit a lot of time and effort to using it "for real".