For people writing papers and theses (master th./PhD th.) and the like, I higly recommend the use of the TeX/LaTeX typesetting system, the “de facto standard for the communication and publication of scientific documents.” There are several TeX distributions freely available on the internet, such as MiKTeX for Windows-based computers, or teTeX for Unix compatible systems. TeX implementations are also available for Apple computers (ask Google). For the bibliography for your papers, I recommend using Jurabib BibTeX (Update: Jurabib is no longer being developed. BibLaTeX looks like a nice alternative, however, it has not made it yet into the official MiKTeX source. I’ll keep you posted.).
To develop and edit your TeX/LaTeX documents I recommend TeXnicCenter for Windows-based computers and Kile for Unix/Linux based computers (KDE desktop environment, runs under Gnome aswell – with additional libraries).
Unfortunately, I do not use TeX a lot these days because many publishers require a word document and converting TeX into doc-format is a bit of a pain. Suggestions welcome!