What constitutes a prototype? A fully working model for detailed testing? A lump of wood in the shape of the thing? A website on paper? A conversation?
All of these things can be prototypes. The important thing is to use the right one, so you get the results (or surprises) you want. I believe most people don't do enough early prototyping but get caught up with technology way too early.
Cardboard is your friend. I've got a bit of a phobia of blue foam - to a potential user it still looks too slick. If people think you've spent ages making something they are much less likely to criticise it. You need to make people comfortable enough to tell you what they really think.
Cardboard with electronics is great, the prototype might be working in a fairly sophisticated way but the roughness lets people concentrate on the interaction and not the look of the thing.
Testing an experience can also mean you acting as the computer (Wizard of Oz style). This can work well with things like info booths and ticket machines etc. All you do is take on the role of any mechanical or software changes that need to occur. For example: acting as a monitor would mean, standing behind a square hole changing over paper screens as the user trys out the system.
How do you prototype non-physical experiences, services etc.? You need to take on the role of the provider and let the user experience what they would get from the service. This may mean using the phone or email, writing letters, or delivering products. You need to use your imagination and be resourceful at the prototyping stage of a project - it should be the most fun bit!
Rory Hamilton 2005 
"Cardboard is your friend"
When user testing, don't lead users on. Video the test if that helps (but some users can be put off), then you can look back at your own and the users behaviour. Don't be so convinced that your design is right that you won't change it. This is the time to put your ego aside; you can pick it up again later.
Too many bad projects appear because early testing has not been done or has only been given lip service. Users are useful; they can do a lot of the thinking for you. Testing also helps prove to others that you were right all along. Or can give you ideas for completely different projects. However in the end it's your design so don't be afraid to take what they say with a pinch of salt too.
