Timecode measures time in Hours:Minutes:Seconds:Fractions-of-seconds called frames. However, in NTSC video, a frame is not an even fraction of a second. Thus, NTSC timecode is always subtly off from real time—by exactly 1.8 frames per minute.
Drop-frame timecode numbering attempts to adjust for this discrepancy by dropping two numbers in the numbering sequence, once every minute except for every tenth minute. The numbers that are dropped are frames 00 and 01 of each minute; thus, drop-frame numbering across the minute boundary looks like this: …, 00:00:59:27, 00:00:59:28, 00:00:59:29, 00:01:00:02, 00:01:00:03, …

Additional information can be found in the SMPTE 12M specification.