How Fedualism Worked:
A country's king divided all the land into portions, each called a "fief".
The King granted these fiefs to those who swore loyalty and service (Oath of Fealty) to him. He granted land to both barons and vassals (or knights) in exchange for services and taxes. The barons and vassals swore an Oath of Fealty to the king in exchange for land. So, when the king wanted to go to war or defend his country, he could call upon these barons and vassals to build up his army.
The barons also had the option of paying fines or hiring military men or professional knights to assist the king in their place. The number of soldiers sent in was directly proportional to the amount of land that the baron oversaw (ie, the larger the fief the more soldiers required).
Peasants and serfs lived in the fiefdom and worked for the overlord. A certain amount of product the serf grew or made was owed to the overlord in return for living on this land and for the overlord's protection. In harsh times, if the serf was not able to make enough surplus, his family would starve. In addition, the peasants were heavily taxed by the overlords (who in turn owed tax to the king).
For more information:
Spartacus.Schoolnet.Co.Uk - a nice overview starting with William the Conqueror
Knighthood and Chivalry in War and Peacetime Article
The Feudal System
Norman Social Organization and Feudalism