The term refers to the practice of adding unboiled hops to the wort/beer after it has been cooled and transferred to a fermentation vessel. It is more akin to steeping than anything else. Since this method involves no heat, it extracts no bitterness; it is solely for the purpose of adding more hop aromas and flavors to the beer.
The standard dry-hopping method is to add hops to the beer once it is finished fermenting, and has been transferred off of the yeast. The amount of time a beer spends dry-hopping varies depending on the beer style, but 1-2 weeks is typically adequate. While it is not absolutely necessary, some brewers steam the hops before adding them to the beer to avoid any possibility of contamination.