"What I call an interactive HTML prototype goes a step further by linking navigation on an HTML wireframe to other wireframes representing subsequent screens, filling in content as needed, and adding mock functionality such as drop-down menus and fields that dont tie into any backend."
Exactly. I use HTML wireframes every time I need to spec anything complex, simply because you can fire up the browser and click on them (yes you can create hyperlinks with Powerpoint but that really doesn’t feel like using a web site) and mimic actual user behavior. I started doing that when I had to create an advanced search engine for real estate listings. I could easily detect what was wrong with my early trials and improve the flow from screen to screen, based on feedback from coworkers and the client. Non-HTML prototypes don’t feel nearly as real because of the lack of interactivity.
9/19/05 update: Comparing deliverables (static vs. HTML wireframes).