Because of the circular nature of a hard drive, most operating systems will store files in the first available spot that they come to. Frequently the files may be too big for the hard drive space that they select to place the file, so they have to go elsewhere on the disk and place the remaining part of the file there. This can occur several times until the entire file is stored on the hard drive, meaning that it could take five or ten scattered spots on the drive to place the. That is fragmentation. Reorganizing them in a contiguous fashion is defragmentation. Another way to put this if you prefer a library analogy, think of a shelf full of books, but instead of the books being the shelf, they are scattered in different parts of the room. This scattering is fragmentation; placing the books on the shelf is defragmentation.
Here are six free disk defragmentation programs that run in Vista.