Sleep will basically turn off everything in your computer but keep a small power applied to the RAM to maintain the system state so that it can turn back on 'instantly'. This will require that you keep the power plugged in however.
Hibernate writes the current contents of your system RAM to your hard drive so that you can turn off the power completely/move the system around and still get back to a useable desktop relatively quickly. Although to be honest, I'd personally prefer a clean shut down over hibernation.
I think Vista also used to have a 'hybrid sleep' mode where it would basically do both of the above, so that you'd have a failsafe if you pulled the plug while it was sleeping. Dunno if this feature has been kept in Windows 7 though.
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