The tools I use while writing Unholy Wars:
For the basic formatting and editing of text I use Word, something everyone should have access to but if not, Open Office is a much more powerful tool and entirely free. Open Office is a 50 meg download.
For making PDFs, PDF995 is a very simple to use PDF printer. When you install it the program sets up a virtual printer on your PC, to create a PDF simply print the document, select the PDF printer from the list and it sends the doc to a brand new PDF document in the location of your choice. The end result is exactly the same as if you had printed it to paper. I think the only downside is if you try putting a background image in the document, PDF995 doesn't deal with that so well but it might be more to do with Word, I'll know more once I start using OpenOffice. PDF995 comes with several optional extras which come to a 10 meg download at most.
For illustrating I use several tools and things get a little more complex and time consuming here. For the 3D rendering end of things my personal preference is to use 3D work. Many people feel that 3D is somehow cheating but like more traditional methods the end result depends on how much time you are willing to spend on a picture. Take a look at some of the galleries on deviant art in the 3D digital art section to see how good it can get. At the very least you end up with an image where the proportions and perspectives look right. Personally I use several programs for this bit.
The first and main one is Poser, since most of what I do involves rendering human figures and poser is the best there is for this. It allows you to load a humanoid figure, dress it, pose it and then take a picture or export it to another package for more work. It also allows you to import models for other 3D packages and convert them into something poser uses natively.
For the actual rendering work, poser is not so powerful, so once I have everything dressed and looking right I import it into DaZ Studio, a free tool that behaves like poser in almost every respect. The only downside to Studio is that it doesn't handle transparent or semi transparent items very well, so glass or hair can look a little shitty sometimes. Studio also lets you do fine tuning on small body parts much more easily than Poser. What it boils down to is that poser renders more slowly but Studio has some small flaws. Once you have a graphics card that handles OpenGL though you're laughing either way. Poser costs around 100 euro for version 4 and 200 for version 5. Version 5 is not shockingly popular however but it is getting more support - maybe in a year or so it'll start being the norm instead of the exception (many models require a certain version or above).
DaZ also sells the best 3D content that exists and it can get rather expensive. However there are always offers and sales on this and other sites but as a general rule you will almost certainly need the Michael 3.0 and Victoria 3.0 models, morphs and textures. Stephanie, David, the FREAK, the Girl and others are rarely necessary. This will cost you no more than 100 euro for both complete packs. There are a massive number of free items and clothes for these models and membership of their "platinum club" gives you access to more than 700 items for 2 dollars a piece. Other sites with a load of cheap or free items are Renderosity and RuntimeDNA. Just remember, the only difference between a denim jacket and an FBI agent's jacket is the texture, the same goes for Jeans and Combats. So once you have a basic model you can save cash by making your own textures - take a look at the free ones for some idea how. Also, bear in mind that your demands will change over time, so the best thing to do is some stickman sketches ahead of time before buying anything to determine exactly what you want. Also bear in mind that 3D is not perfect and it is not for everyone, details like wrinkles in the skin don't come out as well as in normal artwork or photos and it takes a huge amount of work to make it photorealistic but for my money you get faster, better results more quickly than you would from the pencil art you see in most RPGs. A final point is that for some reason people can get quite pissy about 3D art in RPGs and it can look a little plastic if you're not careful. That said, A State was given an award for its illustrations which were all 3D, so you never know.
As I said before, you can import several other 3D model types into poser and convert them, these free non poser models are all over the net and you should have no real problem finding them Turbo Squid is a good place to start but a "Free 3D X models" (where X is whatever you're looking for) in google will set you on the right path. If you don't feel like spending money on Poser you can always use 3D studio Max. It has a 30 day free trial version available for download so once you have all the models you want you can simply load them into this and export them as an OBJ file that the free DaZ Studio can use, or just render them in your 30 free days. Just be aware that learning the basic principles of 3D will take a week or two.
With 3D, as with traditional art, you get out what you put in. Using 3D will ensure that your proportions and perspectives look right and does a lot of the work for you. The right lighting and camera use will do a lot more but at the end of the day you'll probably want to do some postwork on the images you create. That said, I don't and I'm perfectly happy with the results, see my gallery for a few examples of poser or DaZ Studio renders with little or no postwork (the most I've ever done is to soften the image or enhance the edges). For this I generally use Paint Shop Pro 6. Again, the most recent versions are available as 30 day free trials, usually long enough to do what you want to do if you're committed to finishing soon. Photoshop is popular too but harder to use. Either of those will set you back quite a bit, so use the gimp instead, it's free and as powerful as photoshop with the ease of use of Paint Shop Pro.
So to summarise.
Editing and formatting - Open Office - free.
PDF printing and editing - PDF995 - free.
3D work - DaZ Studio - free.
3D models - free all over the web, humanoid models will cost maybe 100 quid.
Image editing - the Gimp - free.
And to summarise further, the only thing you have to spend cash on is the 3D models and clothes for them as a rule. It is only as expensive as you want it to be and if you decide to go with traditional art or photographs edited with the Gimp then your costs diminish even more. The point of this guide was to prove that anyone with even a small budget can produce a decent, professional looking RPG with minimal expense, I hope it was of help.