rather than “use existing” you need to choose “copy media”. You need to have enough hd space to fit the copied media but the bar graphs at the top of the media manager window should indicate how much you’ll need as well as how much you’re losing from the original file.
Once the Media Manager has done its stuff you then have to go (in the finder) to the folder that your original media clips were in and delete them. The Media Manager doesn’t delete the original media, it just creates new media referenced by your subclips. This enables you to consolidate down on to a single drive (or even a cd-rom for small jobs) while keeping the entire media on the original drive/raid. It also means you can check the new media before you delete the originals, I’ve only had the media manager garble the data once but I was very relieved not to have to redig.