Maximum PC recently did an article to test the effects of defragmentation. They found that in many cases, after a defrag with various programs (Auslogics Disk Defrag, Diskeeper 2008), their harddisk benchmark actually DECREASES in both bootup, shutdown, as well as overall PCMark benchmarks. PerfectDisk 2008 is the only 3rd party program they tested that improves slightly in both bootup and shutdown time, but suffered great loss in PCMark scores. However, Window Vista's own built-in defrag program proves to to be the best defragmentator to use, improving both bootup time (decreased by 20%) and PCMark; but shutdown time was greatly hindered (increased by 70%) like most 3rd party programs.
So in short, dont bother to defrag unless you've gone at least 6 months without doing so and that you have more than 100GB of data in your C: drive. These test results were shown in June issue of Maximum PC.
They recommend Auslogics Disk Defrag as your free alternative to Window's own defrag.