Disc fragmentation happens when you constantly delete files and make new ones. Defragmentation is a way to bring files back together and make things load faster.
Say for example you have the following files:
ABCDEFG
You delete files D in the middle which leaves you with a gap:
ABC_EFG
Then you want to add news file H. H is too large to fit in the gap, so part of the files have to be added to the end as well as filling in the gap:
ABCHEFGH
What disc defragmentation does is move the files around so that common files are together. So in our case it may do this:
ABCEFGH
A good tool I would recommend to do this is: http://www.piriform.com/defraggler rather than the standard Microsoft tool. It’s free and easy to use :).
Source: http://en.wikipedia.org/wiki/Defragmentation and others