After much experimentation and testing, I now use the following workflow for editing with Premiere Pro CS4.2+AE on Vista (will also work on Windows 7):
Download and unzip: [attachment38u7sx5]VideoBase.zip[/attachmentu7sx5] (New version 3/22/10. No longer necessary to edit the script files on Windows 7. To run on Windows 7, right-click and Run As Administrator)
1. Place 5D/7D clips in the MOV directory.
2. Using MPEGSTREAMCLIP or Adobe Media Encoder, create 640x360 Apple Photo JPEG MOVs with quality 70 and adjust up or down to balance file size / quality. Use uncompressed 44.1 audio. Output the files to the PROXY directory. These proxies are typically less than 1/2 the size of the originals (as opposed to 4-5x larger than the originals when using native-sized proxies and 100+Mbps codecs).
3. Double click on the proxy.bat file.
4. Load Premiere and create a new project.
5. Import the EDIT directory (which is a Vista/Win7 alias).
6. Create a Desktop sequence with 640x360, 44.1 stereo audio.
7. Add a few clips and check quality / performance. Make sure "Scale to Frame Size" is enabled (can set this to default in Prefs).
8. Create a "FULL" sequence with the same resolution as your source material (for example 1920x1080@30).
9. Click on the PROXY sequence (640x360), Select All, then Copy, then click on the FULL sequence and past in the clips. Check performance (might play OK, but will likely be slow).
10. Exit Premiere and run mov.bat, then restart Premiere.
11. Render out the FULL sequence and check results. The quality will be the highest possible: no transcode losses.
12. To save time when switching between PROXY and FULL, in Premiere go to Edit/Preferences/Media and check "Save Media Cache files next to originals when possible". This will eliminate recomputation of the audio peak files, for example.
The 640x360 proxies have enough resolution for editing clips. For detailed color grading you can switch to FULL to grade, then switch back to PROXY to see it in motion in real-time. The proxies also run reasonably fast in After Effects: 720p and 1080p are very slow in AE on my QuadCore 3GHz MacPro (even when using Blackmagic MJPEG, Cineform, or ProRes (transcoded in OSX ). If not using AE, you could try larger proxies, such as 848x480 or 960x540.
The proxies can also handle quite a bit of grading/effects and still run in real-time. In OSX, FCP7 with ProRes can handle quite a bit at native resolution, though the ProRes files are quite large (LT and Proxy are more reasonable, but still ~2-4x larger than the proxies). However, the FCP workflow is antiquated, clunky, and 'dis'-integrated- I eagerly await an update to FCP, where everything is integrated and seamless (or at least dynamically linked as with PPro and AE).
I have used this workflow for many, many hours of editing and fairly complex projects: it's fast, stable with the tools, easy to use, and produces the highest quality possible in the final output.