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I am creating an application for ipad currently in prototyping phase. The application is on therapy for health. I am not sure as to to what level of prototyping must be done in order for the usability testing to be done smoothly (task based testing mostly). Due to limitations, fully functional prototype cannot be created. Also what are the best ways to usability testing to be done in this regard in limited time. Can usability testing and proof of concept be over-lapped ??

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It's a pretty broad question. Perhaps you can do some selfstudy first on usability testing (this is a very pragmatic book that I've used all the time: – Misha Scholte Mar 24 '13 at 21:11
This is a very broad question that will be hard to answer meaningfully given its scope. You have several questions in here, so I would recommend breaking them out into separate questions: What level of prototyping; rapid usability testing; usability testing proof of concepts – Charles Wesley Mar 27 '13 at 23:53

I think a non-interactive prototype can tell you quite a bit of information, but generally is more informative about the layout or look and feel rather than the interactions (it is just harder to switch between screens effectively compared to an interactive prototype). If your application does not have very complex or deep level of tasks, then I don't think you should worry too much about the fully functional prototype because it won't tell you too much more what even a paper prototype can reveal about general usability, which is what you are trying to work out (or probably all you can work out) at this stage.

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If you're able to do some form of guided testing, make sure you have some visual feedback - make sure their actions "feel" like they're doing something, even if the information is updated/changed manually.

This creates the proof of concept (mostly for a non-technical manager) as it is more than a wireframe and some video - and gives you the opportunity to control the information that is presented during usability testing.

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Going with a fully functional prototype can be very time consuming. Instead, I would recommend defining a library of UI elements that you can re-use across multiple prototypes. The idea is that you test your prototype against a set of large scope user-stories, in which you can test the validity of the main concepts of your App's UX.

DIY-like user testing involves a selected panel of users, the test master holding a device which can record a video of the tested subject using the prototype, a piece of paper with a scenario on it, a quiet room.

Can usability testing and proof of concept be over-lapped ??

Absolutely. You can get your proof of concept validated by user-testing.

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