It's a misnomer.  Absolutely all termites do need water to live and none can survive long in totally dry wood.  The drywood termites, though are very good at getting by with surprisingly little moisture and this enables them to live in small colonies in small pieces of wood.  Just so long as the wood is good food that stays sufficiently moist and doesn't get too hot or too cold, they can thrive.  Mostly they are found in the tropics, in forests and along water courses, in fact anywhere that regularly has enough water in the air so wood tends to stay moist.

Most mature drywood colonies number less than 1,000 termites and it may take the colony the best part of a decade to get to that size.  Countering this, their habit of living within a piece of wood means that a house, tree, boat or even a door can house lots of separate colonies.

They're cryptic. They don't tunnel in the soil, they don't build shelter tubes, they don't build mounds which means that drywood termites can be hard to find.  Each colony tends to make one or more holes in the surface of their nest wood.  They use these as waste chutes for faeces, blocking them up after use.  Drywoods make these little hard pellets because they generally need to retain as much water as possible.  Often a pile of pellets is a sure sign.  I first noticed it as a gentle rain of pepper-like material falling from the roof frame of a rustic restaurant in Carita, West java.  Even sitting 4 metres below the roof, I knew for sure they were there.

Normal termite barriers (used for subterranean termites) are no use against drywoods.  Using baits seems just plain silly.  In small timbers (like doors, furniture, wooden legs etc.) it is easy to control the colony.  In buildings it is often better to fumigate or 'treat' the whole structure, since you can rarely be 100% sure of finding and killing each individual colony.

The drywood termites are all placed in the Family Kalotermitidae.  The main one around the world is the supertramp West Indian Drywood Termite, Cryptotermes brevis but there are tens of others that regularly worry people.