Photoshop (Cuz it rules)
GIMP (Cuz it almost rules)
Illustrator for things designed to be printed (because it's so much easier than trying to figure out Pixel:DPI ratios in Photoshop's image resize/resample settings, lol).
As far as hardware goes...
I've just got my regular Micro$oft Optical wheelmouse, but I also have one of those cheap lil JAM Studio graphics tablet doohickies that you can get on eBay for about 20 bucks. It may be cheap, but if you don't need to use one too often, and can't justify spending several hundred bucks on a REALLY good graphics tablet, this can be a LIFE saver, especially if you do a lot of work cutting backgrounds away from photos. That's my primary purpose with this graphics tablet, and it speeds up the process so much... A lot of the sites I do are for people in the reptile industry - community based sites, animal sales, product sales, and many of them want to include an animal or several in their layout and advertisements (both online and in print)..
In fact, there's an ad been running in Reptiles Magazine for the past year or so that I did for ReptileRap.com/Armstrong's Crickets using a collage of reptile photos I've taken, and my graphics pad proved invaluable for that. There's about half a dozen photos of animals on there that the background had to be removed from. With just the mouse, it would've easily taken me a week to get the fine detail & perfect cutouts that I needed. With my pen, I had it done in a just a few short hours.
For taking the photographs, I use (usually in no particular preference, just whatever I have handy)...
Sony Mavica FD-83
Sony Mavica CD-250
HP315 Photosmart (sucky camera, this one's a last resort for "snapshots" not decent quality photos)
Nikon N90s 35mm SLR camera (these prints are then scanned on my friend's HP scanner - not sure of the model - and they're scanned using Photoshop with the twain driver provided with the scanner). The N90s gives me the most control over my shot, as it's an SLR, but film & development can get expensive real quick, so I only use this when SUPER high quality is required. I'll get around this problem when I can spare 1500 bucks for a Nikon D100
I know you didn't ask for hardware, but I thought i'd give you the whole rundown. The JAM graphics pad works GREAT with photoshop, it's pressure sensitive (with varying degrees of accuracy on Win2K - although I heard it's flawless under '98SE, I haven't tried it in XP) and photoshop takes note of that fact and draws accordingly.