A while back we had to do some usability testing, but didn't have much of a budget. We ended up getting it done with a setup that was new for me.
I was accustomed to having an expensive lab with one-way mirrors and video cameras to watch and record the user as he/she interacts with the application under test.
Instead, we used a plain, small conference room for the tester. The tester's computer was hosting a pcAnywhere session. And, the room had a speakerphone on.
In a larger conference room, the observers watched the test screen through a pcAnywhere session projected on the wall, and listened in on the speakerphone.
I was very pleased with the results. It all seemed to work well, and was an effective, inexpensive alternative to a real usability lab, IMHO. I plan to use this setup again.