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First, I highly recommend you do some Windows Updates. Your XP should be at SP3. Manually go to Windows Update and click the Custom button to make sure you have even the non-critical updates. You may have to do this several times to get all of the updates.
The AVI file that your camera produces is an MJPEG-AVI, which Premiere Elements 2 generally can't work with.
In the FAQs to the right of this forum, we explain how to use Windows MovieMaker to convert this to an editable DV-AVI.
Once you've converted this video to a DV-AVI, you will be able to edit it in Premiere Elements.
Steve Grisetti brilliantly answered my question. Thanks, Steve!
Happy moviemaking, Gary!