Situational GMing is a style of GMing, the one I am most comfortable with. It is not the ultimate, best, or coolest method, merely one that works really well for me, and one which is often misunderstood. Take this post not as avocation, but as explanation.
Prep is minimal in this style of GMing. Maps if needed are generated. Important NPCs are detailed - not usually their stats and skills, but their motivations, goals, resources, personalities, and organizations. This information is generated in my own games by pick-or-roll tables I include, and which I often use in other games. I also set up lists of typical opponents I can throw at the party when I need in Encounters.
The First Situation *will* occur, sometime in the first session. Sometimes I lead off with it, sometimes I wait for the PCs to get to know each other a bit. The players may react to this situation however they choose. This situation is set up by looking at what the NPCs are trying to do and their resources, and with them creating a situation which the PCs must in some way react to. The PCs react to this situation with energy, pushing it out into an action. I see how the NPCs will react to the PCs' action, and apply resources and organization in the way they would, based on their goals, motivations, and personalities. This back and forth act, react, and react to the reaction process can last a good many sessions.
How NPCs Work
NPCs are not the enemies or the friends of the PCs. They may become such during play, but they are just aiming for their own goals. If their goals conflict with the PCs, they may clash. If their goals coincide, they may ally. If they do neither, they proceed along their own paths. Sometimes alliances turn into friendships, or even romance. Sometimes opposition turns into bitter enmity. I jsut play them according to their personalities, goals, and motivations.
These I come up with based on how the last session ended. It is set up like a First Situation, but occurs at various times when I feel it's appropriate.
These come up whenever I feel they are warranted, depending on the situation. They take no prep, as I did them up before the start of play.
NPCs Arising Out of Play
This happens fairly often, where an NPC intended as window dressing becomes somhow important to the PCs. I use the same tables I use in initial Prep to generate what I need to play them on the fly, refining it all after play, between sessions.
When someone achieves his goal, the game is basically over, though the PCs may - and usually do - continue on.