I think I win the award for cheapest setup.  I've got an ex-gov desktop bought at auction for $200 which runs 2gb of Ram P4 3ghz and runs Win XP pro.  Laugh all you like at XP but it's a solid OS.  It's kind of annoying because I have slotted in extra hardware and can't update the bios because it was locked up for government use.  I also use a HP laptop which runs 512 mb ram and is a 1.16 Ghz pentium M processor, bought at one of those warehouses where they clean out end-of-line machines.  Just goes to show you don't need lots of money to be a developer (although the $2k for VS Team Edition was a bit of a different story)

My file storage / exchange server / domain controller is a 10 year old Dell with 512Mb Ram (slots all filled) running at 333Mhz but with it's gizzards stuffed full of RAID drives.  I have to leave the side cover off because it doesn't fit on anymore, and it's got a slight overheating problem anyway.  You'd be surprised at how well this runs, though the fans are getting a bit noisy.

It's not about the size of your hardware, it's how you use it :)

For testing purposes, I run VMs with 256/512 Mb of Ram, just to see how little system resources my code can get away with!

I've been meaning to upgrade hardware for a while, but computer shops are full of geeks with attitude (GWA).  Maybe I'll look in the paper for some upcoming auctions - much more fun and you get to buy all sorts of stuff.  Besides, I really like creating franken-puters from parts lying around.

It's all a step up from my first development platform : an IBM Jx running PC-DOS with 256K of Ram and a sizzling 4.8 Mhz clock speed, loaded with the old IBM basic interpreter.  My first programs ended up with a lot of out-of-memory errors.