Enter Disk Defragmenter. This utility physically rearranges the files so that they are stored (as much as possible) in physically contiguous clusters. In addition to the consolidation of files and folders, the Defragmenter utility also consolidates free space - meaning that it is less likely for new files to be fragmented when you save them. For operating systems prior to Windows Vista, you had to manually run the utility or schedule automatic defragmentation via a scheduled task. On Windows Vista, Disk Defragmenter runs as a low-priority background task that is automatically run on a weekly basis without requiring user intervention. On Windows Server 2008, which uses the same Disk Defragmenter, the automatic defragmentation is not enabled by default. Also, the color-coded display that was part of earlier versions of the utility has been retired (believe it or not, more than a few people have asked about that!). Aside from the GUI version of the tool, you can also use a command-line version that enables some more granular control over the process. The utility name is DEFRAG.EXE and does require administrative privileges to run. The basic operation of the utility involves passing it a driver letter, for example: defrag.exe c: would perform a defragmentation of the C: drive.

Get the full piece at: http://blogs.technet.com/askperf/archive/2008/03/14/disk-fragmentation-and-system-performance.aspx