As for physical papers:
I have two coexisting systems. The first is a file cabinet organized by author. Organizing large numbers of papers by subject or date or whatnot ravels out of control. The second is a series of magazine racks labelled by project, which contain papers directly relevant to the corresponding projects.
As for electronic papers:
I used to put them in folders by author, with helpful filenames like
but maintaining this got old. I tried Papers, and thought it was going to be fabulous, but like Scott, wasn't won over in the end.
But now search has gotten good enough there is much less need for explicit organization. You can just put the pdfs all together in a ginormous folder, and whenever you need something just search for it. It's the google way. (And if you use Google Desktop, then literally so.)
Here is the one thing I would like to be able to add to this system: it would be great to be able to add tags to papers, which would even further facilitate targeted retrieval and browsing. Does anyone know an easy way to do this?