"Paper prototyping is a variation of usability testing where representative users perform realistic tasks by interacting with a paper version of the interface that is manipulated by a person ‘playing computer,’ who doesn’t explain how the interface is intended to work." http://paperprototyping.com/what.html
"Paper prototyping is a method of usability testing that is useful for Web sites, Web applications, and conventional software. Here's how it works:
You first decide on the tasks that you'd like the user to accomplish.
Next, you make screen shots and/or hand-sketched drafts of the windows, menus, dialog boxes, pages, popup messages, etc. that are needed to perform those tasks.
Then you conduct a usability test by having one or two developers play the role of "computer," manipulating the pieces of paper to simulate how the interface would behave. Users are given realistic tasks to perform by interacting directly with the prototype -- they "click" by touching the prototype buttons or links and "type" by writing their data in the prototype's edit fields. (Using transparency or removable tape prevents the prototype from being written on directly.)A facilitator (usually someone trained in usability) conducts the session while other members of the development team observe and take notes. The “computer” does not explain how the interface is supposed to work, but merely simulates what the interface would do. In this manner, you can identify which parts of the interface are self-explanatory and which parts are confusing. Because the prototype is all on paper, you can modify it very easily to fix the problems you find."
Paper prototypes or other mockups are used clarify requirements and enable draft interaction designs and screen designs to be very rapidly simulated and tested.
Links to extended descriptions: