Music Software

The software you use (and how you use it) to create music at home can have a great impact on the quality of the end product.
As always, bigger is not necessarily better, but the price of software reflects it's quality more often than that of hardware.

These are the software tools that I have and use

Multi-track Recording

Cakewalk Sonar 2
I used to wish that I could use Steinberg VST products when I had a slow computer, if only for the realtime effects. As it was, Cakewalk has always been very forgiving of limited resources, and I got used to it. Now that I have a faster machine, Sonar (although less forgiving) is the descendant of Cakewalk, and I am used to it.
Sonar is a multi-track recording studio that lives on your computer as software. It allows you to record audio and MIDI tracks in mixed sets. You can also apply real-time (through "auxilliary busses") and after-the-fact effects to the recorded tracks. Although it does not support VST effects a-la Steinberg, there are a good many high quality DirectX effects plug-ins available. Sonar has also introduced DXI effects and MIDI plug-ins, immensley widening the scope of what can be accomplished with Sonar.

Audio Editing

Wavelab
Wavelab is an audio editor made by Steinberg. My version is quite old (v 1.6), as I don't use it much. I generally use this when audio processing has to be in realtime. It supports both DirectX and VST plug-ins.

Sound Forge
Sound Forge is an audio editor made by Sonic Foundry. I have version 5, but there is a more current version available.
This has some nice processing built in that can't be gotten with other packages that I know of.  Sound Forge is my favorite wave editor, and I use it for mastering and tweaking individual tracks if such work cannot be done in Sonar.

DirectX Plugin Effects

Waves rules for quality 'meat and potatoes' processing like compression, limiting and equalizing. It's expensive stuff, but worth it if you are serious about your home recordings.

IMO, Timeworks makes the best 'inexpensive' reverb and delay line plug-ins around. They are easy to use, have usable presets, and an interface that is very natural if you are used to harware effects.

DSP is really good for stereo enhancement type processing, such as stereo field dynamics or aural exciter effects.

One of my favorite processors is by BBE. It's called the Sonic Maximiser, and is basically a loudness contour filter. Easy to use (3 controls), and adds real thud to drumkits.

Another fave (although not strictly an effect), the Antares Microphone Modeller is a great gizmo that allows you to emulate different microphones using a different source microphone.
For instance, I can make my trusty Shure SM57 to sound very like a Senheiser 421 with the filter switch set to "Music". Pretty handy for getting more 'air' into vocals.