The basic method is

import numpy as np
import pandas as pd, os
from sklearn.feature_extraction import DictVectorizer

def one_hot_dataframe(data, cols, replace=False):
    vec = DictVectorizer()
    mkdict = lambda row: dict((col, row[col]) for col in cols)
    vecData = pd.DataFrame(vec.fit_transform(data[cols].apply(mkdict, axis=1)).toarray())
    vecData.columns = vec.get_feature_names()
    vecData.index = data.index
    if replace is True:
        data = data.drop(cols, axis=1)
        data = data.join(vecData)
    return (data, vecData, vec)

data = {'state': ['Ohio', 'Ohio', 'Ohio', 'Nevada', 'Nevada'],
        'year': [2000, 2001, 2002, 2001, 2002],
        'pop': [1.5, 1.7, 3.6, 2.4, 2.9]}

df = pd.DataFrame(data)

df2, _, _ = one_hot_dataframe(df, ['state'], replace=True)
print df2

Here is how to do in sparse format

import numpy as np
import pandas as pd, os
import scipy.sparse as sps
import itertools

def one_hot_column(df, cols, vocabs):
    mats = []; df2 = df.drop(cols,axis=1)
    mats.append(sps.lil_matrix(np.array(df2)))
    for i,col in enumerate(cols):
        mat = sps.lil_matrix((len(df), len(vocabs[i])))
        for j,val in enumerate(np.array(df[col])):
            mat[j,vocabs[i][val]] = 1.
        mats.append(mat)

    res = sps.hstack(mats)   
    return res

data = {'state': ['Ohio', 'Ohio', 'Ohio', 'Nevada', 'Nevada'],
        'year': ['2000', '2001', '2002', '2001', '2002'],
        'pop': [1.5, 1.7, 3.6, 2.4, 2.9]}

df = pd.DataFrame(data)
print df

vocabs = []
vals = ['Ohio','Nevada']
vocabs.append(dict(itertools.izip(vals,range(len(vals)))))
vals = ['2000','2001','2002']
vocabs.append(dict(itertools.izip(vals,range(len(vals)))))

print vocabs

print one_hot_column(df, ['state','year'], vocabs).todense()

vocab = ["NY", "LA", "GA"]
categorystring = '0'*len(vocab)
selectedVocabs = 'NY GA'
for sel in selectedVocabs.split():
    categorystring = list(categorystring)
    categorystring[vocab.index(sel)] = '1'
    categorystring = ''.join(categorystring)

This is the end result of my won testing, turns out Python doesn't support string item assignment, somehow i thought it did.

Personally i think behzad's solution is better, numpy does a better job and is faster.