I just wish the Arduino had a debugger! How I'd love to be able to set breakpoints and step through code.
You could develop in Atmel Studio. There is a commercial simulation product, too, https://gitorious.org/simavr
I come from a Fortran77 on Honeywell paradigm and the concept of well placed diagnostic print statements seem to serve me OK. When I had access to a simulator and breakpoints, I rarely used the features. As the 328P is only like $2.10, I am not overly concern about multiple compiles and downloads wearing on the 10K+ estimate of flash memory lifetime. 
Of course, I am doing this stuff from a hobby perspective and would certainly want to use better tools in a commercial programming job. But, then I doubt that I would be using the Arduino GUI and libraries although I see no particular reason the hardware would not poses mustard, except that non-clones are a bit pricy for anything other than a protype.
Ray