I use Vegas Movie Studio Platinum HD. I have been happy with it and it is more than sufficient for a new machinima maker. Once you get more advanced there are other things that you will probably want to dabble in like After Effects, which I personally have not used.
I will keep this question in mind for our machinima school. Perhaps I can interview other machinima makers about what they use and why.
Photoshop is always a nifty tool to use for photography editing, but you can always use it's free conter part Gimp it has pretty close to the same funtionalities that photoshop has. Other than that there's lots of free photo editing programs you can find on the internet as well like Picmonkey to name one.