According to USA Today, hail forms when strong updrafts inside a storm blow raindrops back up into sub-freezing layers of the atmosphere. This causes the raindrops to supercool and freeze, in some cases absorbing more moisture or ice from the surrounding clouds. The longer a hailstone spends rising and falling within a storm, the larger it becomes before finally falling to earth.
In most cases, when water condenses out of a thunderstorm cloud, it simply falls to earth as rain. If the moisture content of the clouds is extremely high, the cloud layer is very tall and the storm experiences strong updrafts, then the conditions are good for hailstone formation. These are also prime conditions for the development of tornadoes, which is why these devastating storms are often accompanied by damaging hail.
As hail rises and falls inside a storm cloud, it picks up new layers of moisture from the surrounding clouds. When it rises into a sub-freezing layer, that moisture freezes onto the surface of the hailstone, gradually enlarging it. Eventually, the hailstone becomes too heavy for the storm's updrafts to keep aloft, and it falls to earth. Hailstones typically fall when their diameter is less than an inch, but larger hailstones have occurred in particularly powerful storms. In 2010 a hailstone with a diameter of eight inches fell during a storm in South Dakota.