One way to think of it is to take something like jelly beans or gumballs. Mix them all up and put them on the floor so you can look at it flatly.
Lets say the red ones are your DDO files. When the game wants something, it has to hen peck each red one out. That takes a while doesn't it. The DDO files are fragmented.
Now, lets say you actually had all of the red colored stuff together in a nice grouping. When you need to pull up something for DDO again, you have everything right there and you can find it much faster.
This is where your performance gain will come from. Some textures, sounds, and such are loaded while questing. The fragmented files slow this down pretty good.