Moving this discussion to the Premiere Elements forum.
I always recommend against opening a project created with an older version of the program with a newer version of the program. It almost always leads to buggy behavior like this.
If you can, open the project (or an auto-save of it) in version 8 and finish your work there.
First, I would see this article to get a background on what is contained in the PREL (Project) files: http://forums.adobe.com/message/3397716#3397716
Next, I would look over this article, on the linking of Assests, and the "Where is file ___ ?" dialog: http://forums.adobe.com/message/4598705#4598705
Last, if you have "Media Offline," then this article might give you some background, and tips: http://forums.adobe.com/message/3561281#3561281
Good luck, and hope that those articles are helpful.