it's the size of the drive:
2.5" = 2.5 inches wide
a 3.5" is the size a normal tower uses, and likely is removable and changable. While a 2.5" is likely a sealed case drive.
I currently purchased a hdd case and 250GB drive and put them together, if i decided to move the drive to my tower and swap out say my 160GB drive to my external i have the option, the versatility is nice.