What is best way to manage multiple projects with limited HD space?

I am running Premiere Elements 3 on a HP desktop with a 250 GB hard drive. I also have a 500 GB external HD attached. The main desktop HD is filled up with programs, photos, and current video projects for PE 3. PE seems to work best when it can access files from the internal HD and not have to access them from an external HD. Since I have many video projects going now, I cannot keep all the clips on the desktop HD so have put them on the external HD. I used to keep just backups on the external HD, but now have to keep some of the original copies of clips and projects as well. So when running PE3 I have to copy things back and forth to the desktop computer HD so I can run it without it needing to access the external HD. This takes alot of time.
Is there a better way to do things? What is the best strategy for running PE when HD space on your computer is limited? Do I need to free up much more of my 250 GB internal HD space so I can run all current projects from there? And what is the best strategy for backing up my clips and projects. Multiple external HDs? Thanks for any advice on file and project management.

First, welcome to the forum.
I do just as Steve suggests, though for slightly different reasons. I need each Project to be portable between my laptop and my workstation. I have a couple dozen 1 - 2TB FW-800 external 7200RPM HDD's, so each Project goes onto one of these. Obviously with the size, I can group several normal Projects onto the same external.
In my case, most of my Assets are stored on a NAS drive, and I will copy these over to the appropriate Project folder structure on the externals. If I have done Capture, those files will be in the Project's folder structure too. My stock stuff is always a copy, as will be my still images. Each Project has a root folder with its name and then appropriate sub-folders, i.e. Stills, Music, etc. below that root folder. All stays together.
One trick for my case is that each external has the same exact drive letter assignment in the OS of each of my computers, so that external Z:\ is Z:\ on all computers. This must be done at the OS-level for all computers. I use labels on each external, so I know that I have Z:\, or Y:\ plugged in.
For editing, this is not the most efficient way to handle Projects, or Assets. In a perfect world, one would have their OS and programs on C:\, their media on a RAID 0 D:\, their Projects and Scratch Disks on E:\, their Exports on F:\ and maybe their audio on another RAID 0 G:\. All original Assets would be backed up to maybe a NAS unit. This would give the greatest efficiencey, but would kill my portability. I pay a price in efficiency, so that I can spend much of the day by the pool on the laptop and then move the complete Project, along with all copies of all Assets and Scratch Disks upstairs to the editing suite. The workstation is setup like my ideal, but if I have a Project on it (using all of the resources of that machine and it's multiple HDD's), I cannot easily move down to the laptop - so I sacrifice the speed for the portability.
One comment on using externals: FW-800 works fine for me. All of my newer external HDD's have that connection and each computer has either a FW-800 card, or ExpressCard. The use of eSATA would be even better, but I have a major investment in FW-800, so I have to consider that legacy. Someday, they'll all be eSATA, or whatever comes next. I found that FW-400 was too slow for me, so I relegated those older externals to just archive. Years ago, I tried USB externals, but found that I have problems with them, plus the connection speed was painfully slow. I gave up completely on those. I do not think that I have any USB only externals left. Goodwill got them all. I also tried to edit to/from my gigabit NAS and gave up on that because of the speed. It now is a storage unit for stock Assets that are copied over to the Project folders.
If you have USB externals, give them a try. Just be a bit careful, especially if you have a faster computer, as that connection can cause problems if the data stream gets too big and too fast for the connection. Things will definitely go wrong at some point in a read/write cycle. Be very careful and keep copies of all irreplaceable Assets and also your Project files. Little is worse than having something get corrupted because the USB connection could not keep up. I've even had overloaded USB's shut down the entire system in a BSOD. Not very comforting, when you just completed 6 hours of editing!
Good luck, and hope that some of this helps,
Hunt

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