Important note:
We’re currently on WordPress 3.0 and the process for managing widgets is the same as described in this article and in the video on widgets in WordPress 2.8.
If the process changes in a future version of WordPress I’ll publish an updated article.
Original article starts here:
For more details on Widgets – what they are and what they do – see this post.
The introduction of version 2.8 brought some big changes to the way widgets are managed in WordPress.
It basically restored the functionality that was available in versions before 2.5, but it’s wrapped in a much nicer looking interface now. 
And it’s a great improvement.
Here’s how to install and manage widgets in WordPress 2.8.
Go to the Appearance>Widgets screen and choose the sidebar you want to add the widget to. Click the down arrow on the right of the sidebar title to see what widgets are already installed there. (See 1 below). If there are no widgets installed you’ll see a blank space.
From the list of widgets on the left of the page, click and hold the one you want to add and slide it into the blank space at the bottom of your sidebar panel. (See 1 below).
When you drop the widget into the sidebar the editing screen will open automatically (2 above).
Alter or update the settings, or add your HTML code if it’s a text widget, then click ‘Save’ (bottom right of the edit window) and then ‘close’ (bottom left).
You can re-position a widget within a sidebar, or move it to another sidebar, by simply clicking, holding and sliding it.
If you want to deactivate a widget, but you don’t want to lose its settings (or its HTML code if it’s a text widget), simply click, hold and slide it to the Inactive widgets area, which is just below the list of widgets. (See below).
This is a much neater way to manage widgets than was available in WordPress 2.7, but if you have any questions leave a comment!
Update: 19th June, 2009
This post triggered quite a few views so I thought it would be helpful to create a video on managing widgets in WordPress 2.8 – I hope it will make things clearer. You can find it here.
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