I am working on a corporate video that is about 1 and a half hours long or more. The project folder is nearly 250gigs of DV files, graphics, and music and so on. I have all of this on a 4 disk Raid disk array.
Premiere 2.0 does not perform as good with these long projects as it seems to do with short projects.

I was wondering if my timeline playback might be better, and less demanding on my system if - I instead of the RAID with everything on it - I had the files on separate hard drives. Like a drive for graphics and audio/music and a drive for video and a drive for render files... something like that. Would that be better?

It shouldn't be, in most cases raid will offer the best performance for a given number of disks, and be easier to manage. Defraging might help, but Premiere does bog down on long timelines.

So is it just premiere's fault that it cant handle long form projects and theres nothing computer wise you can do to improve it beyond a certain point?

More Ram, faster CPUs. I hear that using XP64 helps, even though Premiere runs in 32bit compatibility mode on that OS.

My personal experience: instead of one long project, work with several small projects, in other words break up your project in several 20-30 minutes projects.