Hard drives are divided into logical units called partitions. In most cases you don't really notice this fact, because drives commonly have only one partition on them. There are two basic reasons why you would have more than one partition: you have multiple operating systems (using different file systems) on the same drive, or your hard drive exceeds the maximum partition size for the file system type. Multiple operating systems are beyond the scope of these pages.
In versions of DOS earlier than 3 (more or less; I forget exactly when) the maximum size of a partition was 32MB. With DOS 5 through Windows 95, that limit was raised to 2GB (2048MB). That used to be plenty big enough for a single partition to fill up most hard drives, but in the last year or so even larger drives have become common. So we've had to start dividing the drive into multiple partitions again, each one no more than 2GB.
Using the FDISK program, one of the partitions must be a Primary DOS partition. The rest of the drive space is taken up by an Extended DOS partition, which is further divided into as many logical drives as needed (there are a maximum of four partitions per drive.)
See the page "What happens to drive letters" for information on what drive letters are assigned to each partition.