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We all know the benefits of keeping your hard drive defragmented. Fragmentation is the result of Windows moving or removing data from the hard disk and leaving blank space on the drive. Keeping the data on the hard disk contiguous (or all together in one block,) increases the speed of Windows as it searches for data.
The analogy I like to use to describe this phenomenon to users is that fragmentation is to Windows as potholes are to a sprinter -- The more potholes in the road, the more the sprinter has to slow down to avoid them. Sometimes, if the potholes are bad enough, it can cause the sprinter to trip. Windows can also "trip" in these unused areas on the disk as it searches and can cause slow performance and even system failure.
In the past (Windows 95, 98...) the disk defragmentor tool, found under Start-->Programs-->Accessories-->System Tools, was used to take this fragmented data and slap it all together into a single, contiguous block of data. To my dismay, now when you attempt to defrag an NT, 2000 or XP hard disk the defragmentor refuses to place all of the pieces into one contiguous block. After it completes the process, it shows unfragmented blocks spread across the drive leaving blank unused areas between them. Some areas still show blocks of red (which indicate fragmented pieces,) on the drive. I was still left with what appeared to be a fragmented drive. I have used third party tools, like Norton Speed disk, but the appearance of a fragmented disk remains.
After some research, it seems that windows NT, 2000 and XP doesn't allow applications to move directory entries (on FAT partitions,) and metadata files (on NTFS partitions.) So, if the defragmentors cannot move this type of data, they are left where they were created -- scattered across the drive.
One additional note -- If you are experiencing the defragmentor error "not enough free space to defragment drive," try reducing your pagefile (virtual memory) on that drive or move it to another drive completely. Many times admins forget that they have alotted a gigabyte or more to virtual memory, and thus have used up most to the disk.