Photoshop's scratch disc/volume serves the same purpose as Window's pagefile or virtual memory - it's where information is written to, temporarily, such as history states and all of the layers, etc.. If you have a second physical hard drive in your system,
PS wants you to set the scratch disc to be on the other drive, that way it doesn't interfere with the pagefile and vice-versa. If you only have one hdd, then this isn't an option. You could try lowering the amount of history states (under preferences) so that the space needed for scratch is smaller. It may help - it may not.
Your best bet would be to install a second hdd, even if you just get a used 2GB one off of eBay (which would probably cost more for shipping than to buy it) and set PS's scratch disc to that one (again, under preferences).