I would find this situation extremely frustrating. I've very anal about my paperwork and my book and can't stand it when things aren't "pretty" or aren't exactly as I like to have them... I know, I have what we like to call "the problems"

Anyways, if they won't let you photocopy the script, see if they'll let you destroy the book. This would be a very time consuming process but if I were in your situation I would probably pursue this vs. having to keep my prompt book in a 5x7 script.
Decide where you would like to have that 5x7 block of script oriented on the page. For simplicity, let's just say you'd like it smack dab in the middle. Grab a stack of white paper and cut out a 4.5x6.5 box in the center. Take one page of your script and paste it over the hole. Voila, you can see both sides of your script and you have room to write all around it. I think you get the point. If you're working for a place that needs to return the scripts after your production, you of course will not be able to destroy a copy to do this.
I'd probably talk to the producers again to figure out what the concern is here. What if you suggested that you make 1 photocopy for your book and then gave it to them to destroy after the show closed? Of course, they'd destroy all records of their production, but maybe they'd go for it. After all, if they're returning these scripts after the show anyways, they'd need to return your one and only copy of the prompt book. I've never worked for a theatre that had this kind of restriction and I hope I don't have to anytime in the near future!
Good luck!