A lead sheet is most often a sheet of staff paper with the title of the song on top, and the composer and/or arranger's name on the left. The style of the song (swing, rock, samba) is typically indicated above the first bar, along with the tempo. The key is indicated with a key signature.
The basic melody is written using musical notation, with lyrics written underneath (if any). Along the top of each measure, the chord changes are written with chord symbols. For example, an A minor seven chord with a flat five would be written Am7b5.
A lead sheet tells each musician in the band what to play, without the need for separate pages. The singer and/or lead instrument can follow the written melody. The pianist, guitarist or other accompanying instruments read the chord changes. The bass player also reads the chord changes and adjusts his rhythm based on the style indicated. The drummer follows the style indicated and reads along with the melody to keep track of the form and accent phrases.
Lead sheets are most commonly used in a jazz band or combo setting. Rock, pop and other small combo groups may also use lead sheets to learn a new song.
A lead sheet is different from the full compositions and music read by orchestras, wind symphonies and choirs. With those ensembles, each player has a specific part and does not see what the other musicians are playing. Only the conductor has access to all of the parts, which are notated in what is called a score.
Lead sheets work best when used by professional musicians comfortable with reading music and improvising. The biggest benefit to a lead sheet is that each member knows what the others are seeing and can therefore interact more freely with one another. Another benefit is the obvious conservation of paper.