Dispenser

A Dispenser is a special block available since Beta 1.2. When right-clicked, a menu allows you to place items inside it. Each time the block receives power from a redstone circuit, a random item from its inventory drops out.

Unlike chests, when a dispenser is destroyed, the items inside are gone forever. Notch has stated that this is a bug:.

A basic tutorial can be found here.

Crafting
When placed, the dispenser faces the player (it will dispense items towards where the player is standing).

Dispensing
Most items placed in a dispenser will simply be ejected as items and land 2-4 blocks away if on level ground. Arrows, eggs, and snowballs that are stored inside the dispenser are instead fired out (as if they were right-clicked in your inventory). Arrows will cause damage (and cannot be picked up, like arrows fired by skeletons); eggs and snowballs break with all the usual effects.

Unlike most other redstone-triggered devices, it may be triggered by redstone wire placed up to one block adjacent to it as well as running directly into it; therefore a single redstone wire can trigger up to 5 dispensers in a cross pattern. This allows for easy creation of large walls of dispensers.

When a dispenser dispenses an item, it emits a clicking sound and a puff of smoke. If it is empty when activated, it emits a slightly higher-pitched click.

A dispenser will not work if it is placed underwater, unless all sides but the face are covered with a block.

If the face of the dispenser is covered by a block, and the dispenser is facing west or south, fired items will pass through the block.

Trivia

 * The Dispenser uses the same texture as the Furnace on all sides except the face, which has a unique texture.
 * Interestingly, the texture file for the dispenser menu is named "trap.png", possibly because it was originally designed for making arrow traps.