Steganography is the art of hiding a message, rather than encoding it. If a message is not suspected then it is rather difficult to begin to decode it.
Often, stegnaography will be used in conjunction with cryptography in order that even if a message is discovered then it still cannot be read.
Quoting from the muslim heritage site:
In the fifth century A.C. a Greek exile named Demaratus living in the Persian Empire witnessed the build up and mass of forces by the Persian king Xerxes. Xerxes had intended on conquering the Greeks and Spartans, and was massing his great fleet and forces in preparation for a surprise attack that would catch the Greeks off guard leading to a simple victory. Feelings of patriotism lead Demaratus to warn the Spartans, a task which was not easy as he was living within the Persian empire, and so any form of correspondence between him and the Greeks may be intercepted leading to his execution. He therefore demonstrated ingenuity by stripping a writing tablet of its wax coating, writing on the wood underneath, and then re-waxing the tablets.
The trouble with Steganography is that, as with Demaratus, it is 'security through obscurity'. Once the existance of a message is suspected, then it is often not long before the message is discovered. Indeed, in some situations the existance of a message is enough for trouble to ensue. In this case, however, Demaratus was lucky, and the first person to work out the puzzle was a Spartan Princess.
In World War 2, the prisoners in the German Stalags would send messages through the German censors by using placements of certain words within sentences. E.g. they might use the second word of one sentence and the second to last word of the next.
In this digital age, steganography has many possibilities. Given the large number of graphic and audio files on the net, information can easily be hidden by intelligently and subtlely changing occasional bits in an audio file or graphic file. If one has an original photograph, and destroys the original so it is not available for comparison, it is hard to spot if a pixel has bene changed from that shade of red to that other very similar shade of red.
Other possibilities for steganography lie in the fact that when a file is deleted from a computer, unless special steps are taken (like the 'wipe' command in pgp) then the original file is still on the hard drive, only the pointer to it is removed. As a computer is used, over time the file is written and the disk fills with fragments of files, random junk. One could use this fact to fill a floppy disc with random junk and then hide a file by changing occasional bits within that file. One would have to be careful not to write to that disc, as bits might be overwritten. If one wanted to guard against this one would fill up the spare space with junk of ones own, then delete it. This wouldn't destroy the visible files on the disc, but would destroy information hidden in the 'random junk' (to be effective, this would have to be done several times, as some residual information remains in the magnetism on the disc which could be recovered, just not easily).
Steganography can allow files to be digitally 'watermarked'. For example, a digital signature of an image is generated, and embedded into the image using steganographic techniques. It is possible to do this in such a way that the watermark survives even quite heavy manipulation using tools like photoshop. At any point, the watermark can be extracted and the copyright holder established. Of course, in this case it isn't really steganography as it may be desirable to let people know of the existence of a watermark, as it reduces the chance of having to inform them - the important thing is that though the watermark can be read, removing it should be computationally difficult.