Update: even with the correct settings, I was going from (for example) a 7mb file to a 5mb file, didn't seem like much reduction but I did notice that the original, full-size files seem to play fine in the tiny Canvas and Viewer screens (which are prob. 1/16 original size). So, I figured I'd go ahead and use the files as-is and save the worry of reconversion later.
However -- probably a coincidence -- after spending a few hours organizing footage in FCP and syncing sound, some glitches flashed and I got a grid of vertical lines and rectangles -- the screen froze and after trying to restart a few times (unplugging the external harddrives first) the imac fan started going very very loudly and I realized that my machine may have reached the end of its life.
I kinda doubt it has anything to do with the large files -- but maybe?
Anyway, I guess it's time to take it in and see if I can salvage the old monster or if I need a new one.