turtle,
the "scratch disk" is an equivalent to virtual memory (well sort-of... easiest description). Photoshop requires alot of memory to perform and store (history) all the little changes done on the file. Having a drive partitioned off and using one of the segments as your scratch disk allows PS to work faster and smoother (especially if the "drive" is defag'd and used just for PS work...)

This is NOT totally necessary, Adobe recommends it but PS will run with your "start-up 'C'drive" selected as your primary scratch disk. You will get a message (it's not an error message, just a warning/comment) stating you should have a different drive designated other than your startup.

outside of that, you can alway purge your "history" and other memory intensive areas to keep running smoothly. Nothing worst than working on a job and finding out "There isn't enough memory to perform this function" when you go to save your work!!(had this happen to me!)

:)
retrocity