Microsoft say they fixed it with the new 2003 and 2007 file formats
(but I'm not sure they succeeded - and it seems to introduce new problems of its own) expanding the maximum file size to 20Gb.
The default location for the Outlook 'Inbox' data file is at:
C:\Documents and Settings\<user name>
\Local Settings\Application Data\Microsoft\Outlook
You can also find it by going to Control Panel > Mail and clicking on Data Files ... it will be listed as "Mail Delivery Location" and give the full path and file name of the PST file (which contains all the Outlook data including mail, tasks, calendar etc). It is usually called Outlook.PST.
It is fairly easy to move that file to somewhere more user friendly and easier to access by simply moving the file to where you want it. Next time Outlook is opened it will ask where the PST file is.
For archiving - it is all wizard driven (go to File > Archive ...). You can select a single folder to archive or the whole tree of folders. You can specify an archive file name and location. (It is also well documented in the Help file)
You can either use one rule to archive everything (eg. everything over 90 days) or you can archive each of your mail folders with their own specific rule. To set a specific rule right click on the folder and choose properties, you can then set Auto Archive properties.
You can also set this up to run automatically - see Tools > Options > Other ... \ Auto Archive (tab) to set the default options for auto archiving.
The archive file you create can be opened (if it isn't already) from File > Open Outlook Data File ... You will only need to do this once and then it will open automatically every time Outlook starts. To close the archive file right click on the top of the archive folder in the folder tree and select close. Note that the archive will probably have the same top name for the folder tree as your main data file tree - you can easily change that by right clicking on the folder tree root of the archive and choosing properties and editing the name to something meaningful).
You can use multiple archives if you want, and it is worth periodically starting a new archive so that the archives don't get too big either - eg. You could use archive names such as Archive 2001.PST, Archive 2002.PST etc. to sort all your mail into annual archives (just archive them sequentially starting with the oldest). If there is too much data to do that split them into smaller archives still (monthly periods / six month periods, whatever).
It is all a bit of a faff the first time you do it but once it is done the current year can be set to archive automatically and then you don't need to keep items in your main mailbox longer than you choose (I set mine to 90 days which is long enough for most purposes). If a calendar or task is inclomplete after the set period it will not be archived until it is complete (so eg. if you set a reminder on an email beyond the default archive period it will remain in the main inbox file until you say the reminder has been complete).
The only disadvantage of the archive set up is that the built in search functions of Outlook will only search in one PST file at a time (you just choose the actually file you want to search from a drop down) and it must be pre loaded into Outlook. Alternatively you could install a search engine such as X1
or use a mail manager plugin such as NEO
to index you mail and then it is instantly searchable.
I have never used it but in Outlook 2003 (don't know about other versions) there is also a Mailbox Cleanup tool in the Tools menu.