Neither Palo Alto nor Iowa Falls are more "typical of the US" than the other. What is indeed typical of the US is the diversity within the country. On a personal note, having been around much of the country, I wouldn't be caught dead living/studying in most "heartland" places.

Also, the German program at least has a "philosophy" of spreading people out beyond five cities. We do not get to pick the program or university we go to, but instead the German Fulbright Commission chooses where it sends our application - based on, yes, our preferences, but mostly criteria like match and distribution. And we're told pretty clearly not to bother including only Ivy Leagues among our preferences. You then get what amounts to a take-it-or-leave-it offer. At least that was the case when I entered the program (which was not that long ago), but I'm at a private school, so that may be part of it. In other words, you have to build a strong case for the school you want to go to - and it better not amount to "the beaches are cool ...".

I always assumed that the top schools are actually *underrepresented*, because they are private (with the exception of Berkeley) and hence more expensive.  And although the Fulbright people don't say that officially, their funds do have limitations. ;-)  Of course, most Fullies nevertheless end up near one of the coasts, simply because there are more universities there (and also because the Fulbright Commissions try to accommodate people's preferences, which rarely include let's say the University of Kansas).  Thinking about it, most Americans also live near the coasts.  So aren't the "real" Americans from the "heartland" actually a minority?
On the other hand, I have to admit that I do have the feeling that the Americans I met (in Seattle - Go Huskies!) were unusually well-informed about the rest of the world. This is not too surprising, because as an exchange student you tend to meet mainly students and other people related to university, whose education is above-average in any country.  So part of the criticism might be justified.  However, to remedy it one would have to send the Fulbright students to a farm in Kansas or a factory in Detroit and not to a university, and this *might* have a negative impact on the popularity of the program. :-)
P.S. Apologies and condolences to everybody who studied in Kansas.  As you may have already guessed, I'm not completely unbiased. :-)

Concerning the number of grantees who go to each university in the US, I found this list http://www.cies.org/schlr_directories/vsdir05/vs_dir_state.htm on CIES website listing the names of each Fulbright Scholar who when to which university for the 2005-06 school year.  You can see that people are pretty spread out.  There is even one Fulbright Scholar who studied at "Heartland Community College" in Illinois.  That sounds like a pretty non-elite place to me :)  

My understanding of the Fulbright Scholar Program is that most Fulbrighters themselves pick where they want to go in the US.  I'm fairly certain that only a minority are placed in specific universities.

In many countries, particularly those with binational commissions, scholars are expected to submit evidence that they have identified a host affiliation in the United States as part of the application process, well before an actual grant is awarded. Scholars usually include a letter of invitation from the host institution in their application materials. In other instances, often in countries where the competition is conducted by the public affairs section of the U.S. embassy, scholars apply for awards and identify their specializations. This information is used to determine placement at U.S. host institutions. For these grantees, the Council for International Exchange of Scholars (CIES) is active in confirming affiliations or arranging placements based upon the scholar's interests and needs."

Personally, I think it would be great if more Fulbrighters choose to go to smaller, less famous universities, or if they choose to go to the mid-west instead of the east or west coast, however, all the exchange participants and alumni I've met travel a lot during their exchange experience and don't just stay in one city.
Additionally, I don't think I really agree with the premise of the comment suggesting that there is a single "typical" American experience.  What is a "typical" American experience?  Who are "average" Americans?  People and life in New York City compared to Iowa is just as different as comparing people and life in Frankfurt am Main to Thueringen, where I lived.

In order to host Fulbrighters, the U.S. institution must agree to provide "in-state" tuition to the visitors.  That provides an edge for the public institutions.   In addition, the prestigious "Ivies" can usually attract sufficient international students to "globalize" their campuses, whereas, the state institutions in smaller, less populated, "middle America" look to Fulbright grantees to help fill that function.   New York, California, and Massachusetts are by far the leading states in numbers of international Fulbright grantees, but that's probably as much a function of their population size and the number of institutions in them as anything else.  However, Arizona,  Georgia, Indiana, Iowa, Minnesota and Washington  pretty regularly attract 60 or more visitors a year.   

I had a conversation about it at the IIE somewhere in 2004. NYC has the largest number of Fulbrighters, over 300 annually. Columbia itself is, by far, the leading receiving institution in the U.S. with close to 120-150 grantees annually. Add something like 30-40 Upstate at Cornell, and you have New York State. California is distant second. Also, it's typical to hear (and is not that surprising), that grantees staying somewhere out there in the sticks are treated far better than those received by the big-name-institutions back East. This is not to say that I felt mistreated or neglected at Columbia, but still, my experience (e.g. being assigned a "hot desk" style common room with 12 workstations per 42 grantees at the CLS - I worked in the library anyway) is different from that of a friend of mine who went to Nebraska (and got his own office, a car, a fully furnished house for something like $450 - and was celebrated throughout his stay, taken to BBQs at the Governor's Mansion etc.). Still, I wouldn't switch. But...

This report highlights ways that the Fulbright Program is a force for positive transformation. Sometimes the change may be an increase in new knowledge about the past or cutting-edge research in an area challenging public health. Sometimes the change may be in the way a trade issue is viewed or the way a social prejudice is eliminated. The change may involve just one individual who makes a difference. Other times, there is a ripple effect when a teacher shares his or her new experiences with many students. A hallmark of the Fulbright Program is the cross-pollination of ideas and approaches to issues that takes place from country to country, from world region to world region. For example, Dr. Muhammad Yunus, the founder of the Grameen Bank in Bangladesh, was a Fulbright Student at Vanderbilt University, where he earned his Ph.D. in economics. The Grameen Bank’s use of micro-credit lending is changing the way in which the world seeks to eradicate poverty. The fact that Dr. Yunus came to the United States under the Fulbright Program is not the end of the story. In 1988, American Alex Counts went to Bangladesh as a Fulbright Student to study the Grameen Bank’s micro-credit program. He worked closely with Dr. Yunus and then went on to write a book—Give Us Credit—which chronicles micro-credit lending. So the Fulbright Program reached a Bangladeshi economist and an American anti-poverty activist (who became the first president of the Grameen Foundation USA) and both have made important contributions as they work to improve the human condition. This report is testimony to the fact that the

The German-American Fulbright Program implements Senator J. William Fulbright's visionary concept: The promotion of mutual understanding between our two countries through academic and bicultural exchange.
The Fulbright Program has international outreach, providing exchanges between the United States and over 180 countries and territories worldwide. More than fifty permanent commissions support the work of the Fulbright Program on the binational level, among them the German-American Commission. Annually more than 4,500 scholars, American and foreign, participate in the Fulbright exchange. Since the inception of the Fulbright Program in 1946, it has sponsored over a quarter of a million scholars.
The largest and most varied of the Fulbright programs worldwide, the German-American Fulbright Program has sponsored over 40,000 Germans and Americans since its inception in 1952.
The defining characteristic of the program is student exchange. This core program is complemented by academic year programs for professors, teachers, teaching assistants, and journalists; summer internship programs for students; and seminars for experts in university administration and German and American Studies.
The Fulbright Commission is a binational board consisting of the German Foreign Minister and the American Ambassador to Germany, who act as honorary chairmen, and five German and five American members, all of whom are appointed by the honorary chairmen. Guidelines are provided by the J. William Fulbright Foreign Scholarship Board, whose members are appointed by the President of the United States. The program is administered by the Secretariat located in Berlin, Germany; the Secretariat's partner on the American side is the Bureau of Educational and Cultural Affairs in the U.S. Department of State.

If you're looking for the action in education, forget the Ivy League. Talk instead to Anthony Zeiss, president of Central Piedmont Community College in Charlotte. It has six campuses and 70,000 students taking classes in everything from remedial English to computer networking. With about 12 million students, the nation's 1,200 community colleges help answer this riddle: Why do Americans do so badly on international educational comparisons and yet support an advanced economy?

I enjoyed the article about “foreign” Fulbrighters in the US.  
Equally interesting is where the US Fulbrighters come from.  Here are three reports that look at the statistics from the 2004 US Student program and how many students are accepted per institution.
For example, Columbia University had 92 applicants and 31 Awards (about 1 in 3 acceptance), but Harvard had 98 and 20 (only 1 in 5!) and Cornell was 60 and 9 (only 1 in 6). 
Ph.D.
MA
BA
At some BA institutions (colleges) – Colby, Guilford, Concordia – it was a 50% acceptance rate.  
A lot of it relates to the University’s advising system – if they are good at advising their existing students in applying for Fulbrights, they also may be good at helping visiting students.  Note, however, that one year is not a trend, so don’t generalize too much.  My alma mater (Wesleyan Univeristy) did very badly in 2004 (14 apps, 3 Fulbrights), but I think it’s a great place, and they did much better this year.