As of CS4, there have been a few changes regarding the Project files.
In general terms, I keep my Projects and their files together. For ultimate performance, it's probably not ideal, but helps with housekeeping.
Here's my structure:
Project folder(s) with the Project file (PRPROJ)
Videos (Copies of Video Assets) - this is one place where there might be a slowdown
Audio (all Audio files) - this is one place where there might be a slowdown
Music (all music files)
SFX (all SFX files)
Stills (Copies of all still files used)
Scratch Disks (established in Edit>Preferences>Scratch Disks) - this is one place where there might be a slowdown
As of CS4, there will be some files placed in My Documents. I cannot tell you exactly which files will be there. IIRC, one could change the OS Environment to route these elsewhere.
As for red, green or yellow lines, if one has source footage, that is good to go, but just does not quite match the Sequence Preset, one gets a yellow line. For source footage, that requires Rendering for the smoothest playback, one gets a red line. For Rendered footage, or footage that is perfect, and does not need Rendering, one has a green line.
Now, Rendering is for smoothest playback, and I do many Projects, that are never Rendered. OTOH, I have some, where I might Render a segment 30 times, as I work with animation, etc.