Not to completely plug Adobe products, but we have been finding Illustrator to be a really useful tool in our prototyping phase. While it’s true the advantage of a paper prototype keeps the focus on interaction and not on minor design details (“I’m not sure if I ‘like’ that font…”), the advantage we’ve found in using vector prototypes is that it’s a lot quicker to whip off a design element and push it around on the page (um, and no glue involved either). Not to mention, it’s also incredibly easy to evolve into a finished design template.
In addition, both our developers Mike and James have expressed it was easier to visualize interaction and play with different approaches, especially in a team activity. I do admit to fussing a lot more with the digital copy because of being trapped in that ‘it has to look perfect’ notion; however, I restricted myself to keeping the design as simple as possible, using a grayscale theme to avoid color interpretations (darker gray blocks indicate more emphasized areas).
For those interested in taking the open source approach, an alternative to Illustrator is Inkscape, a free vector graphics editor.