I read the documentation in MSDN, but in the end I didn't get a clear idea what is the practical difference between them, exactly. Both seem to require stdafx.h to be added at the top of every *.cpp file.
I'm using VS2008.
Can anyone help clear things up?
Well, I think that you must first understand the purpose of precompiled headers. In large projects, it can take ages to process all the headers required by a single client extension for example, so some people prefer to distribute the .pch files along with their libraries. In order to generate the .pch files, you use the /Yc compiler flag and the person who wants to consume your library will set the /Yu flag. See here and here for details.