Carpenters need good tools to build a house efficiently. The same is true for SharePoint. Without nice tools, SharePoint development can be frustrating and time consuming. I collected a list of tools which are useful for daily SharePoint tasks.

• Virtual Machine - The ideal development environment is a virtual machine, not a physical server or desktop. It's much easier and efficient to host a SharePoint server and all the following tools in a virtual machine. The most widely used virtual machine softwares for developers are VMWare Workstation and Microsoft Virtual PC 2007. VMWare Workstation is not free, but has lots of features that are useful. Microsoft Virtual PC 2007 is free.
• Visual Studio Team Edition (No Professional Edition!!) 2005 or 2008 – This makes unit testing and web testing easy. The Code Analysis (formerly FXCop) feature on the Visual Studio Team Edition is essential to guarantee the quality of custom code.
• MOSS 2007 & WSS SDK [1] - SharePoint SDK is like a bible.
• SharePoint Designer – SharePoint Designer can be used as a very powerful dev tool.
• Fiddler [2] – Powerful network traffic capturing tool. It can generate an automated webtesting script for Visual Studio as well.
• .Net Reflector [3] – Using this tool, you can reverse-engineer SharePoint dlls to see source code of SharePoint assemblies, too!
• IE Developer Toolbar [4] – It provides a variety of tools for quickly creating, understanding, and troubleshooting Web pages.
• Microsoft InfoPath 2007
• Shortcut to “12 hive” to a desktop – How much time did you waste navigating to "c:program filescommon filesmicrosoft sharedweb server extensions12” folder? Creating a shortcut to this folder saves a lot of time.
• BDC Metaman [5] – Even a shareware can save tons of time for developing a BDC application definition. This seems to be more powerful than the free BDC tool which comes with MOSS 2007 SDK.
• Screen Capture Utility – Screen Capture utility is a must-have tool for making documentation easier. I recommend SnagIt [6], but this is not free. Screen Hunter [7] is a nice screen capture tool as well, and it's free.
• WinMerge [8] – This tool provides win diff functionality plus merging capability.
• Microsoft Office 2007

I would install every tool mentioned above and create shortcuts to a desktop before distributing to team.

[1] - MOSS 2007 SDK: http://msdn2.microsoft.com/en-us/library/ms550992.aspx, WSS 3.0 SDK: http://msdn2.microsoft.com/en-us/library/ms441339.aspx
[2] - http://www.fiddler2.com/fiddler2/
[3] - http://www.aisto.com/roeder/dotnet/
[4] - http://www.microsoft.com/downloads/details.aspx?familyid=e59c3964-672d-4511-bb3e-2d5e1db91038&displaylang=en
[5] - http://www.lightningtools.com/bdc-meta-man/default.aspx
[6] – http://www.snagit.com
[7] - http://wisdom-soft.com/products/screenhunter.htm
[8] - http://winmerge.org/