This article is from the Beer and Other Brewing FAQ, by Kurt Swanson firstname.lastname@example.org with numerous contributions by others.
Dry hopping is the practice of adding dry hops to beer at some
time after the boil. The technique is used to increase hop aroma
in the finished beer, as aromatic hop compounds are quickly lost
when hops are boiled. Common practice is to add the hops to a
secondary fermenter, or if kegging, to the keg from which the
beer will be served. Dry hops added to a fermenter should be
left in contact with the beer for at least a week or two. The
consensus seems to be that the amount of alcohol present by the
time fermenting beer is in secondary fermentation is sufficient
to prevent bacteria and/or wild yeasts from "riding in" on the
hops and contaminating the beer, so sanitizing of the dry hops
is not deemed necessary. Either whole hops, plugs, or pellets
may be used for dry hopping.