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Card sorting was done by giving users a bunch of index cards with concepts from the server written on them. The users were then asked to sort the cards into piles such that cards representing similar concepts were in the same pile. The users were also allowed to group piles to indicate looser levels of similarity, and we finally asked the users to name their piles. These names provided us with additional insights into the users' mental model of the information space and served as inspiration for the names we finally chose.
See also my article about how we designed Sun's intranet, SunWeb in 1994 for another example of card sorting and a photo of a variant of the method, where users are asked to sort cards onto existing categories. (Often called closed card sorting to differentiate it from the more common open sorting where users build their own categories without any constraints.)
See also article on How Many Users to Test for Card Sorting.
Card sorting is one of the usability methods taught in my 3-day camp on Usability in Practice at the Usability Week 2008 conference in New York, San Francisco, London, and Melbourne.