Jensen Harris just posted a walkthrough of how Microsoft prototype using PowerPoint. It's almost identical to the way I've been doing it, although I prefer to build the entire UI from shapes and images before creating a detailed picture and overlaying transparent "hot spots". This makes it much easier to move elements around, which means you can quickly try out different layouts with minimal fuss.
One point is that it's best to stick to small segments of the user interface in each presentation, because things can get very complicated very quickly.