Editor's note (1/12/10): For more-current advice, see "How (and Why) to Partition Your Hard Drive."
No matter the capacity of your PC's hard drive, chances are that it's set up to function as one giant data dump. Though that's fine for most users, dividing your drive into multiple partitions (additional drive letters) can make life easier: At the least, keeping all your data--such as documents, worksheets, and images--in a partition separate from the operating system and applications simplifies backups and can increase your PC's performance.
And if you plan on using multiple operating systems (adding Windows 2000, trying out XP, or even installing Linux), then you'll absolutely need multiple partitions.
Think of a partition as a container for data, like one drawer of a file cabinet. Each partition uses a file system to store and name data. Windows 98 and Me use the FAT32 file system. FAT32 allows for greater maximum partition sizes and stores data more efficiently than the FAT16 file system used by DOS and the first versions of Windows 95.
Windows NT introduced the NTFS file system, which uses space more efficiently and offers better data security. Windows 95, 98, and Me can't "see" the data in an NTFS partition; however, Windows 2000 and XP can read from and write to both NTFS and FAT32 partitions.
If you're starting with a new, blank hard drive, partitioning is easy. The installation routines of Windows NT, 2000, and XP give you some control over partitions. Other versions of Windows come with FDISK, a basic partitioning utility that you copy to a bootable floppy.
But if you want to have extensive partitioning options, you'll need a utility such as Partition Commander ($40) or PartitionMagic ($69). They offer such options as changing the size of partitions and converting from different file systems. And, given enough free space, they preserve the data stored on your drive.