The scratch disk is the location Photoshop uses as virtual memory when the physical memory is full. It increases performance to move the scratch disk off the primary OS drive and onto a secondary drive (preferably the fastest drive in your computer). The video below from GigaOM demonstrates how to swap the disk in OS X (Windows users will find the interface under Edit -> Preferences -> Performance.)
How to Set Your Photoshop Scratch Disk [GigaOM]
