In one of my first posts (or at least so Aaron tells me - I'd forgotten all about it) I promised to spend a little time explaining why Buddhism is, contrary to prevailing opinion, a religion. Since this gives me an opportunity to get back to my primary academic interest (and since Aaron tricked me into answering this question for another purpose altogether earlier today) I thought now might be a good time to say a few words on the issue.
The mistaken impression that Buddhism is a philosophy and not a religion dates from the "discovery" of Buddhism by the west. The misunderstandings that happened in this first encounter have characterized the west's understanding of Buddhism to this day.
As I have been taught, there were two major ways that Buddhism entered the western world. First, Wesleyan missionaries (whose names escape me) were sent to Sri Lanka in the Victorian Era to do what missionaries do best - wreak havoc. In order to wreak the most havoc, though, they needed to understand how the religion worked that they were trying to destroy. So, as any good Victorian Xtian would, they asked to see the Buddhist scriptures. The Buddhist monks let them do it, but they were puzzled, because the idea that a religion was contained in books was completely foreign to them. Yes, they had a vibrant scriptural tradition - one whose size makes the Bible look like a footnote - but it played an entirely different role for them. Buddhist scriptures were, first and foremost, holy objects: they were chanted (often in languages that none of the chanters understood) as part of all kinds of rituals; the tomes themselves were used as objects of prophylactic magic, their real, written words having effects completely unrelated to their semantic meanings. Now, when the Wesleyan missionaries translated these documents, they discovered the theological and philosophical musings of incredibly sophisticated thinkers (on par with and surpassing St. Paul, Augustine, Aquinas, Luther, and Tillich in importance) - but in doing so they completely neglected to notice what these texts actually meant to the people who kept them. And thus they carried this mistaken impression of the soul of Buddhism to the west.
Roundabout the same time, the heirs of the enlightenment in Europe - the deists, some romantics, and above all the Orientalists - in short, anyone who had had enough with stodgy monotheistic religion with its commandments and guilt, began to turn to the East in search of an alternative. How convenient that they found there precisely what they were looking for! A religion that had no real gods, no harsh commandments, no covenants - just the perfection of enlightenment reasoning (Hermann Hesse, I'm looking at you). What more could the disillusioned Victorian ask for? For entirely different reasons, the community of the faithless, like the missionaries, found precisely what they expected to see in Buddhism and left the rest. I might also add that the exact same thing happened in the 1960s in America, when a class of people with a similar sense of disillusionment rediscovered the religions of India and China as a way to find spirituality without religion. This is why you can hear a sitar playing in the background of Norwegian Wood, and why armies of soccer moms do Tai-Chi in the living room once junior's been packed off to school. But regardless of whether this cultural exchange was a good thing or a bad thing, the point is that every time the west has become interested in Buddhism, we've gotten it wrong.
I can't begin to list here all the ways that Buddhism is a religion. There are gods. Lots of gods. Amounts of gods that put the Romans to shame. They have a very colorful hell (actually, there's about eight of them). Many sects have a redeemer figure who comes at the moment of death to transport the believer's soul to paradise (Amitabha); many believe in the Messaianic Buddha of the Future who will come at the end of time to restore Buddhist teaching to a hellacious world (Maitreya). They have an all-compassionate, all-powerful savior figure who hears and answers all prayers (Avalokteshvara), and in China at least this god has become female (Guan-yin) and very closely resembles the Virgin Mary of Catholic belief. There are rituals up the wazoo - explicitly magical rituals that follow the universal do-ut-des pattern of religious exchange: I will honor the deity (or his statue or his relics) with a gift (of incense, food, prayers, liquor, money, etc) so that he will be inclined to do something nice for me. And the list goes on and on.
And don't dare say that this is merely Mahayana Buddhism (the main Buddhism of China), and that the "purer" form of Indian Hinayana Buddhism (and its East Asian progeny: Zen) has none of this religious mumbo-jumbo. Because it does. Lots of it. There is an active relic cult in Ceylon; talismanic magic is pervasive in all legitimate Buddhist communities (and by legitimate I am excluding those started by westerners based on a false understanding of Buddhism), and so on. If we take the example of Buddhist insight meditation (like Zen) as representative of all Buddhism everywhere and for all time, we are commiting as grave a fallacy as if we decided that one single monastery (or even a whole order) of contemplative Catholic monks were representative of all of Christendom, or that the skeptico-deist philosophy of Spinoza were an accurate picture of Judaism. The fact remains that the vast majority of Buddhists since the foundation of the Sangha in about 600bce have never once practiced meditation. They were active participants in a religion that posited gods, that had active temples, that sought converts, that believed in magic, that spoke prayers, and that made sacrificial offerings to various deities. Buddhism is and always has been a religion in every sense that counts.
EDIT: For anybody interested in the surprisingly religious character of earliest Theravada (/Hinayana) Buddhism, I cannot recommend strongly enough the book "Bones, Stones, and Buddhist Monks: Collected Papers on the Archaeology, Epigraphy, and Texts of Monastic Buddhism in India" by Gregory Schopen. It is the first, best, and clearest explanation of precisely the issues I've been dealing with above.
And for the reader with entirely too much time on his hands, I'm providing a link to a short paper I once wrote on the subject: The Paradox of Presence: Reassessing the Role of Relics in Theravada Buddhism.