If I understood your problem correctly, the solution you tried must work. Probably there was some mismatch in settings. To confirm, when you import AVI file, right click on the clip and see properties. Use the same properties to export your 1080p video and then try to have both AVI and exported 1080p file in the same project and play full screen. This must work.
If it still doesn't work, please give more details of both the clips and what you tried.
Is your AVI file standard definition(4:3) or 16:9?
If it is widescreen, exporting the 1080p file to 720 x 480 first should solve your problem.
But if is is of standard definition, there will be letter or pillar boxing in your output, because one file is widescreen and the other is not.
You don't say which model of Canon DSLR you are shooting with, but only a few of the video formats it records to are compatible with Premiere Elements.
Some Canons shoots in AVCHD, which case you should set up your project to match the 1920x1080 AVCHD format.
Others shoots in DSLR format in more than one frame rate, in which case it's very important to know exactly which resolution and frame rate your video is being shot at and select the DSLR project preset that matches your footage. (Also make sure your comptuer has the latest version of Quicktime!)
If you aren't clear on your camera's specs, you can open any footage shot in a program like G Spot or MediaInfo and it should display the codec, frame rate and resolution at work in the file. Matching your video to your project settings are VITAL to a successful editing experience in Premiere Elements.
Thanks for your help. I got the settings wrong in the AVI file. The File
was coming from "Photo to Movie 5.0" and I had set the render setting to
16x9 but not the original slide setting to 16x9.
Cool...so probably we can assume, your problem is solved then?