I've never modelled before and the plethora of software out there is giving me a headache. I just want to make pretty boxes! Arg!

What should I use for making character models? PovRay? Maya? 3Dsmax? Toothpicks and gum?

If you just want to make pretty boxes, Milkshape3D - it probably the simplest, source compatible modeller out there.

Otherwise go XSI as its the recommended/free too for Source.

Cool, I got XSI the other day and am going through the tutorials. Just didn't want to keep going if there were better programs out there.

It says XSI DEMO all over the top/left/right screens. Is that normal? Should I see a doctor about it?

Its normal. The free version is "cut down" for Source. Its mostly to stop you using it for doing renders and such that it watermarks.

where do you get this and how does the watermark effect your models?

it doesn't effect your models ..
it's just something that is printed over your
render .. it's not going to show up on your
model ..

i find xsi pretty complicated ..

Myself would recomend 3ds max (but its brutally expensive) mainly because of the amount of people using it allows for a lot of tutorials and help :)

.. and is easy to learn/use ..

If you want 3dsmax for free (without rendering capabilities or stuff that only matters to professionals) get GMax. The only restriction is its exporting capability, but that can be circumvented by exporting to some other format first, then using another program for converting that to Half-Life. A combination of GMax and Milkshape is nice, for example. Another free 3d software is Blender. I haven't really tried it though.