'One drive for the System Cache' means put your windows "paging file" or "swap file" on a hard drive separate from the drive the Operating System (windows) is on. The paging file is what windows uses to allow you to have virtual memory, more than you have in physical RAM. Unfortunately you need to page to this file on the hard drive, but putting it on its 'own' drive (separate from windows) at least helps.
What this does is to give separate I/O channels to the processes that will really benefit - the OS and the paging file. So with the typical motherboard in the last few years, that comes with Ultra ATA, you have usually 4 IDE channels available (2 devices on each of 2 cables connected to the motherboard). You would have say, 2 hard drives on one ribbon cable (C: and D:) and maybe a CD or DVD burner and another drive on the other cable. You want to install Windows on the C drive and then configure your paging file to be on the D drive to get this setup.
With todays motherboards you would have SATA drives instead of Ultra ATA/PATA drives. You can usually attach at least 6 SATA drives. This allows you to set up your paging file on D,E,F, drives etc which would further improve performance (on a server at least, can't remember if you can do this with XP) - yes you can put it on multiple drives on XP (My computer/Properties/Advanced/Performance-Settings/Advanced...)