You stand or sit in a circle with a few people and have your right hand on top of the person next to you's left hand and the opposite for the left hand. Then you all sing the song and one at a time clap your hand on the person to your left's hand. Then they will pass it on to the next and so on. Then when you get to the vowel part, you continue the same thing until someone claps the other person on the word OUT. If the person pulls away before they are clapped, they stay in the game but if the other person is too quick for them and claps them, they are out of the game. The game continues like that.

Well the version I know goes:

Down by the banks of the Hanky Panky
Where the bullfrogs jump from bank to banky
With an A, E, I, O, U (you), R (are), out!