When your baby "drops" this means he or she has settled down into your pelvis, getting ready for the labor and birth process. Another term you may hear to describe this is "lightening." This term is used because the mother often feels that the load of carrying the baby is lighter after he drops. Because he's no longer pressing up against her rib cage and lungs, the mother can breath more easily after the baby has dropped (although then he's causing more pressure on her bladder, resulting in increased urinary frequency!). The medical term for the baby dropping is engagement, meaning the baby's head has engaged into the pelvis.
You can usually tell that your baby has dropped into the pelvis by experiencing the symptoms I mentioned above, or by noting a change in the shape of your abdomen. Prior to engagement, the top of your uterus will be right under your breasts; you may not even be able to place the width of your hand between the two. After the baby drops you will notice that your uterus is lower and you can fit your hand between your breasts and uterus. After the baby drops you may also notice that your clothes fit more tightly over your belly, because when the baby drops the uterus falls a bit forward in your abdomen, increasing the circumference of your shape.
Every baby will eventually drop down into the pelvis. In first pregnancies, the baby usually drops a week or two before your labor begins; in succeeding pregnancies, the baby may not drop until the mother is in early labor.