ehmm.. how it works ? I wont explain by myself, but I'll copy from Wikipedia:

The purpose of Windows Disk Defragmenter is to optimize the time it takes to read and write files to/from the disk by minimizing head travel time and maximizing the transfer rate. The used techniques include:

1. Moving all the index or directory information to one spot. Moving this spot into the center of the data, i.e. one third of the way in, so that head travel to data is halved compared to having directory information at the front.
2. Clustering files around the directory area.
3. Moving infrequently used files further from the directory area.
4. Obeying a user provided table of file descriptions to emphasize or ignore.
5. Making files contiguous so that they can be read without unnecessary seeking.

http://en.wikipedia.org/wiki/Windows_Disk_Defragmenter