Software for prototyping

Software wise I use Google Docs and Open Office for rules writing.
Photoshop and Flash (I should really use Illustrator) for graphics.

My new preferred method for cards is printing them on plain paper and slipping them into a card sleeve backed by a playing card. This makes it really cheap to reprint and replace cards.

I've used foam core to make board tiles (about 4x4 cm) and I found it too light, but probably an alright choice for larger boards. I usually just mount paper onto cereal boxes ^_^..

For great looking, and really sturdy counters, print on thick, glossy photo paper and mount onto cereal box. I made some double sided counters this way that look great and are really sturdy. A nice secondary effect of using this type of photo paper for things like counters and boards is that it's kind of sticky, so things don't go sliding around.

On a side note. Little cheap 2cm army men do not make great playing pieces. There's a reason Memoir 44 infantry is on a nice big square base.

As my subject says, there are a lot of options. As more people respond, you'll see they do all kinds of different things. Here's what I use:

1.) Paint.NET for designing my boards and cards. <--it's free and there's a good support community. Another option is GIMP. (and I'm sure there are many others...these are two I've used before and I like them).
2.) I just use Word or OpenOffice for typing up rules.
3.) Organizing? I'm not sure what you mean here. Perhaps that just means that I'm disorganized? :) You mean how does one keep all the little game parts and things organized? or...How does one keeps thoughts/ideas organized? <--not sure how to answer this, but perhaps this next section called "TIPS" will help you out:

Tips: random ramblings as I think of them
1.) For cards, if you're just in the concept phase of a game I'd keep it really, really simple and just get some index cards and cut 'em in half. Then write down what the cards do. Do not waste your time designing an awesome set of cards only to find out later during gameplay that the cards suck or won't work. Hmmm...okay...maybe that was a bit extreme. You could design your layout if you want, but I'd concentrate on the gameplay and mechanics first.
Lourad's idea of using card sleeves is great! I will be doing that for my next design.
Another thing I've done in the past is get a cheap deck of regular playing cards and print out your card fronts on labels. Then stick 'em to the playing cards. You could do this same thing with blank labels and then just write down what the card is supposed to do...but that's why I suggested index cards. Just make it easy on yourself...the index cards won't shuffle well, but you're just testing at this point.

2.) Game pieces: There are lots of places that'll sell game pieces. Just Google it and you'll get a lot of choices. www.plasticsforgames.com comes to mind off the top of my head. I haven't used them before, though. You can also go to eBay for good deals on old games and simply use those pieces for your own. I'm working on a space-based game right now and I grabbed Buck Rogers: Battle for the 25th Century and Stargate on eBay for about $11.00 each. Both of those games have hundreds of pieces (men, spaceships, factories, orbital platforms, etc.) Another option is to browse around in a craft or hobby store. The parts that are used for craft projects can also be really good for game pieces.

3.) Boards: Go to www.barebooks.com for some pretty good deals and packages for making your own board games. They sell pawns and other things. Their boards aren't bad. My daughter and I made a game for a 4th grade project of hers called "Survive the Titanic" (her title). It was a simple roll the dice and move game. The board I used was from www.barebooks.com and I printed it on photo paper and simply stuck it to the board in four pieces. It worked like a charm.