For texture creation, I use Photoshop CS4 with Filter Forge. I used to use Paint Shop Pro 9 when I first started Second Life, and only recently started using Photoshop as I wanted to broaden my skill set and also be able to improve the quality of my work.
For sculpties, I use Blender with Primstar (the sculpty add-on). For a free open-source program, it has been a great tool. Maybe not as feature rich as the more professional programs out there, but as a starting point, very good.
As for building in Second Life, the best tools I have are the built in building tools. Although I do use the Emerald client, which adds some nice extras. For example, it adds more decimal points to the values, one button copy/pasting of position/size/rotation, extra shapes, and something I just found out, planar texture auto-align. Although this last one I believe is from the latest version 2226 which is still in Beta.