Stories begin in notebooks during loose brainstorming sessions. The point is just to get ideas on paper, so sketchy drawings and scratchy handwriting are okay. Since there is no pressure of developing a final version, ideas can flow with spontaneity.
Once there seems to be a story worth developing, then it's time to bring out the bristol board and pencils to set about fleshing out the illustrations. This round of drawings can either reflect very much the original notebook sketches or can veer off in other directions.
After all the pages are penciled it's time to ink over the drawings using India ink and a small brush. This is a gratifying phase because the book really begins to take shape as the illustrations become more concrete.
Once all the illustrations are inked, they're scanned into the computer and then cleaned up and colored in Photoshop. The advantage is you can get vibrant, consistent colors. The disadvantage is that it doesn't look organic like watercolor. Stay in art class, kids. Don't drop it so you can have a study hall.
The text is typed in using Adobe InDesign, and that's the software used to actually lay out the book, place the images, and create PDF's that will be sent to the printer. Speaking of printers, they charge a ton for revisions, so don't send them any files till you're work is 1000% ready.