I've always been a fan of Altova's XMLSpy and have used it since it was first released.  Their release of XMLSpy 2007 doesn't disappoint as it adds support for several things that are of particular interest to me such as XSLT 2.0 and XPath 2.0, XQuery and enhanced WSDL editing.  It of course adds many more features which you can learn about at http://www.altova.com/products/xmlspy/xml_editor.html.

The intergrated XQuery editor simplifies writing queries since it offers intellisense, access to different XQuery language keywords, a debugger, plus more.  Here's an example some of the intellisense you get while working with XQuery queries:

 The XSLT 2.0 editor looks and acts much like the previous one which is good for users who have already worked with XMLSpy.  You get full intellisense which is especially helpful with XSLT 2.0 and XPath 2.0 since they add several new elements/attributes and functions. 

 If you've ever needed to debug an XSLT stylesheet before you'll find the debugging capabilities extremely helpful.  I can't even tell you how many hours XSLT debuggers have saved me since debugging stylesheets by hand is like finding a needle in a haystack.  Here's a screenshot of what the editor looks like while in debug mode: 

 The XPath Analyzer is really useful when you need to get live feedback of selected nodes based upon an XPath expression you're writing.  If you've ever wasted a lot of time trying to figure out why an expression isn't returning a node-set the analyzer will definitely simplify the process:

Finally, the WSDL editor has been significantly enhanced compared to the previous version and allows messages, types, operations, portTypes, bindings, etc. to be edited inline.  Here's an example of viewing the Amazon.com AWSECommerce WSDL file:

If you work a lot with XML, XSLT, XQuery or WSDL you'll find that XMLSpy can save you a lot of time.  It also plugs nicely into Visual Studio .NET for an integrated experience.  .NET developers can also use it to generate C# code from XSD schema files.  It's certainly not free (although a free trial is available), but it's well worth the cost in my opinion if you work with various XML technologies a lot (and no....Altova didn't pay me to say that :-)).