Wow this is a loaded question...Ill see if I can help..
As far as sculpting the foam (and im assuming youre talking about expanded polystyrene, the white stuff) you can used just about anything you can get your hands on. Some examples:
Electric carving knife (yes the kind you used on the turkey you burnt last thanksgiving)
Dremel, for the fine details
Grinder, either wire brush wheel or stone wheels
Electric chainsaw for the big rough cuts, be careful with this one!
If you need to glue multiple pieces of this stuff together, theres quite a number of adhesives that can do this, but the best I have personally used is 3M Scotch-Weld 78. It's sold in a tank that resembles your standard propane tank on your gas grill, and it sprays out thru a gun attachment that comes separate. The adhesive bond is actually stronger than the foam itself, good stuff.
I havent had much experience with hard coating the foam, but I know its generally a 2 part urethane spray coating. (Do a search on the boards for 'spookywoods castle' and there should be plenty of information on one particular product ive been accustomed to)
Another option to coat your foam is to do it like EIFS (Google it). This involves a gypsum based compound like plaster thats applied to the foam, it will give you a sandy texture, good for brick/stone textures. Senergy is an example of an EIFS product, and it can be tinted or painted. (www.senergy.cc)
Ill let some of the other guys give you some ideas as well, good luck with it!
Oh yeah and wear a respirator when youre grinding or sanding that foam, it doesnt do much good for your lungs!
Nate Mitchell|creative consultant
[n8 creative studios]