Photoshop: Scratch Disk Is Full. Alternative?

Hey there. I had an older account on these forums, but I forgot the name.

Anyway, just a real quick question for people who might've had similar problems.

I'm currently working on a laptop for work with Photoshop CS2. When I attempt to perform a major operation (Copy and Paste large images within photoshop, magic eraser, etc.), it doesn't perform the action, and says "Scratch Disk Full. Cannot perform <Insert action here>.

Does anyone know an alternative? After reading about.com, an external hard drive came into question. Would this work? Or would we need to buy another copy of photoshop for the desktop that we know works with it?

Any help would be great.
EDIT: Forgot to mention Specs:

Intel pentium M processor 735 (1.7GHz, 400 MHz FSB, 2MB, L2Cache)
80GB HDD
512 MB DDR2
Windows XP
Intel Graphics Media accelerator 900