I'm kind of short on time, so I appologize if someone already covered this...
The basics of photoshop memory and efficiency from a practical perspecitve:
Photoshop needs
1. RAM
2. Scratch disk.
To fufill #1 it asks the OS for memory space... depending on how much is set in the preferences. The OS decides how much goes to RAM and how much goes to VM.
To fufill large image issues, #2 comes into play and photoshop uses it's own proprietary memory management tools (e.g. scratch disk).
What you want to do is balance your ram useage (the little percentage slider, or allocation in mac classic) so that you have enough for photoshop but still enough for your system to run. If you allocate too much to photoshop it will actually slow down because the OS is giving it a ton but then it has to use normal VM to compensate for it's own activities. Too little and the same problem occurs... photoshop starts to page to it's scratch disk.
Ways to alleviate. Find a good balance. The amount of ram your OS needs depends on the OS. Windows home versions suck for this (95, 98, ME, xp Home). Most other OSes deal with it a bit better. So leave some ram available for the OS to work, put your scratch disk on a separate drive if possible or at least a separate partition (this is a good idea for your OS VM as well).
There are also some settings that are hidden in photoshop that can make changes to how your machine behaves. There are some folders in the install folder (also stuff in the gooddies on the cd I beleive) that have to do with how photoshop accesses the hard drive, how it builds the scratch disk, how it uses vm compression, etc. You can turn on and off these functions by reading the readme's and following their methods. This was more of a big deal with older versions of PS (5.5 and earlier) as most of the advanced features were turned off. Poke around and see what there is. (check out photoshop/plug-ins/photoshop only/extensions).
Also, and this SHOULD go without saying, but make sure you're on the latest build of your PS version. MOST of the time the x.0.1 version is a memory leak fix for adobe products. In illustrator 9, I remember until 9.0.2 it wasn't even usable until you patched. It would leak so bad that after 5 minutes work it would freeze my machine.
Like I said, sorry if I'm repeating, just thought I'd throw that in there since a lot of people don't know the balance theory and think that just jamming the memory up higher is the solution.
$0.02
