Improvisational acting entails a free-form approach to a given scene or character. The actors receive general information about the roles they play, as well as a basic idea of where the scene should be going. They then use their acting abilities to create impromptu dialogue and move the scene along spontaneously. Improv is usually comedic, but not always.
Lose Your Inhibitions
Theatrical acting can create a terrible sense of self-consciousness among performers, which memorized dialogue may mitigate somewhat. Improvisational acting pulls that crutch away. If you want to excel at improv, drop your concerns and inhibitions. Don't be afraid to fail or look foolish. Embrace the possibilities and fling yourself into them headlong; if you fall on your face, it doesn't matter. The more you lose yourself, the better you'll be able to conjure clever on-the-spot dialogue or create a memorable character. Work at it and maybe even tape yourself while performing. You'll find your inhibitions lowering a little bit every time.
Work as a Team
Many improvisational scenes involve "leaders" who provide the cues and basic direction for the scene. He'll provide a line of dialogue to set off the scene, which the other players must play off of to move things forward. Within that dynamic, players need to keep the spirit of the scene alive. Don't hog the spotlight by dominating the dialogue; let other actors contribute. If they move in an unexpected direction, go with it rather than resisting their ideas. If someone points out an imaginary elephant on stage, pretend that you see it too instead of fighting against the notion. As you develop your improv skills, you'll fit more readily into a group dynamic, allowing you to create memorable scenes together rather than squabbling or stumbling over each other.
Practice Creative Thinking
Improv depends on developing good ideas on the fly, whether it's a clever piece of dialogue or a memorable subject. You can stretch those abilities outside of the theater by practicing quick creative thinking. Sit at a mall or similar public location and pick a passerby at random, then spend 60 seconds making up a background for that person (though you should keep your thoughts private and/or refrain from being rude). You can also close your eyes and open a newspaper, then put your finger down on the page. Speak constantly about the article (or ad or photo) that your finger touched for a full minute. Such exercises stimulate your brain power and let you come up with good ideas quickly, rather than freezing or panicking when forced to invent something.
