Paper prototyping involves creating low-fidelity prototypes of interfaces using paper and testing them with users. Key steps include following design guidelines, creating separate prototypes for each user story, integrating prototypes, and taking photos of the process. Proper preparation for testing includes designing tasks based on usage scenarios rather than just finding items, focusing feedback on terminology, navigation, content, layout and desired functionality. Testing involves a test participant, paper mockups of the interface, and a facilitator observing the session.