The scratch disc would be an external drive. This speeds things up by reading from one disc and writing to the other instead of reading and writing from the same disc. Not sure if your iMac has FW800 but if it does, use that as its faster than USB2. FW400 is comparable to USB2. If your using multiple tracks for video and sound, you will need FCE or pro but if your only using single tracks, iMovie might work for you. Apple just upgraded FCE to 4.0 and heard they took stuff out so compair 3.5 to 4.0 before you buy. Apples support board shows folks talking about this. Glad to have help. Let us know if you have any other questions.
Randy