"Indexing" a drive has to do with the ability to find files and display information about them quickly on a drive. When a drive is indexed, that means that the disk is being scanned and information about files (size, creation dates, content, keywords, type, etc.) is being stored in a database. That way, when you perform a search (like with Spotlight), the system can quickly scan that database and use that to return search results, which is many, many times faster than searching the drive file by file.
When you first install Mac OS X Tiger, your entire drive is automatically indexed, which can take some hours to complete and may slow down the machine a bit. After that, only short, incremental, unnoticeable indexing procedures will be performed when the disk contents change.