I see a lot of games in "pre-production" and was just wondering what actually happens in this stage. Is it just planning or does a prototype get made or what?
It depends from project to project and from company to company. Typically "production" starts when the main work begins on what you could call the "construction" phase of the project, usually when the main coding work begins.
In the pre-production phase the groundwork for the project is being laid.
The core team of designers will be setting out the overall design goals, agreeing on an art style and discussing general technical requirements with the code team (say, deciding that destructible scenery is needed as supposed to wanted).
They will probably be creating design documents for the overall design, and possibly beginning some detailed design of the very early stages of the game, or more likely, the first parts to be implemented for the VSD.
Art may be producing some concept art for themes from the design and gathering some source material as reference.
Code may well be working on existing engine tech, or producing some prototype elements to test feasibility of some required components before the main work begins.
Pre-production is the stage where design documents are written, a production plan is created and often a review of the technology to be used. A proof of concept is also common.
Basically, getting the ideas down on paper, with the most general version of the concept sorted out.
It depends entirely on the game team what exactly pre-production is. Its intent is always the same: To prove out that this game can be made, within the given constraints, and has a chance at being a success.
In my opinion, preproduction means that you've established the entire pipeline from initial art & design work into the final engine, the core of your game engine, and you've proven that the core mechanics are fun. When prepro is done, you should be able to fairly painlessly ramp up the team size and create the game without any majore surprises.