Cutout animation is pretty much exactly what it sounds like: cutout shapes arranged on a flat surface, and manually moved and repositioned to simulate animation. Cutouts can be colored paper, white paper with drawings on it, even photographs, and can be completely flat or can sometimes be 3D objects, though this ventures away from cutout animation and into stop-motion animation. Many often use cutout animation to make photographs of people and animals to make it seem as if they're talking or moving, often resulting in a 2D marionette effect.
The actual step-by-step process of cutout animation is somewhat related to the process in stop-motion animation, and can be just as tedious because it requires manual intervention. First the scene is created using cutout objects, laid out flat against the background image. This scene is created on an animation stand, with the rostrum camera positioned above the animation stand and positioned to pan or zoom over the scene. The camera is used to capture the scene created with the cutout shapes.
The scene then has to be adjusted to the next frame in the sequence, much like stop-motion animation / claymation - making it notably different from traditional animation. Rather than working between keyframes, cutout animation has to be produced from beginning to end in sequential order, with each change between frames involving minute adjustments to the assembled pieces before the next image in the sequence is captured on video. Sometimes parts of animated cutout characters need to be changed out, if the character changes the angle of their position or changes facial expressions. Facial expressions can be drawn on different heads, or the different facial features can be cutouts themselves, allowing them to be moved or swapped out with different features.
This method of animation is what creates the signature somewhat jerky style, even when animators strive to create completely smooth motion. The cutout pieces can often seem to jitter and bounce in place.
Despite the difficulty of cutout animation, it's still a relatively simple animation style that's quite popular among novices because it requires little drawing or application of complex animation principles - although in the hands of more advanced animators, the technique can produce some surprisingly spectacular results. Some also choose to add in special effects after filming, using programs like Adobe AfterEffects.
One of the best examples of cutout animation is the animated franchise South Park. When South Park was originally created, it was actually filmed using construction paper cutouts against a backdrop, with the characters pieced together from different pieces and filmed one frame at a time on an animation stand. Later the show was upgraded to computer animation techniques, using programs like Flash to simulate the cutout animation look and feel, right down to mimicking the slight hint of shadow created by the layers of thicker paper stacked atop each other. Much of the show is actually currently produced in 3D, but rendered to look like 3D while retaining the original cutout style.
Commercials often also make use of cutout animation styles, often using a more time-lapse video effect that shows the animator's hands manipulating and moving around the paper pieces, with the playback accelerated to make the animation progress more quickly. One of the most striking images of cutout commercials in advertising is the Quiznos commercials that use everything from freaky furry monsters to kitten photographs to create cutout animations.