I've just found this post from Half-Baked Brownie Guider. The idea seems fairly straight-forward: each person who wins recieves a package from the person running the pay it foward. They then put together three packages of their own and allow people to enter a draw for them via. a blog or messageboard. On a specified date three names are drawn and those people are the new set of winners - each receives a package and is expected to run their own pay it forward for others.
Like a chain letter only not so nasty. I came across a chain letter that involved mailing people nice (new) knickers - I never got any :(
(I did wonder when I'd next use the underwear tag)