Neil:
In SS1, you will not have access to any of the OpenRoads tools discussed in this thread. In the SS1 products, there are DEM import comands that are similar and which create legacy Terrain Model files instead of the new DGN based terrain models in OpenRoads.
Regarding the DEM files themselves: The national Map viewer allows you to clip to a certain area before download. You simply define a fence in the map viewer and only that area is downloaded. You do not have to download the entire quad.
Reprojection is easily accomplished using the Data Acqusiition tools which use the DEM engines that Mathieu refers behind the scenes. There are some limitations and maybe a couple of bugs in SS1 which are addressed in SS2 and SS3. Using Data Acquisition, you can filter the points to reduce terrain size even further. Although 10 meters seems pretty course, you can often filter and reduce size by 50% or more without degrading the accuracy to an appreciable degree. Remeber, that the filtering does not inddiscriminatly throw away points, there is some logic at work.