Couldn't agree with this more. When I originally read the OP's question, I assumed he was asking how to prepare as a candidate, and you gave a great answer for

Couldn't agree with this more. When I originally read the OP's question, I assumed he was asking how to prepare as a candidate, and you gave a great answer for how to prepare as an interviewer -- the question is ambiguous and even on re-reading I'm not sure which he meant. To add to your answer, having them build a clone of a simple game in 1-3 hours, especially when they have to balance a bare bones look with more features versus a slicker look with fewer features, and deciding which to cut and what's important to them and how they think about it -- all that can be revealing.