I probably missed the fact that this new feature existed in Visual Studio 2005 due to not doing much XSLT lately. I was re-reading an article by Nick Weinholt which made reference to this feature. Several third party tools have had this ability since VS2003, so it is a welcome addition to Visual Studio 2005’s feature set.
If you are learning XSLT, then this can be a valuable tool for stepping through transforms and getting a feel for how they work.
To show just how old this information is I’m linking to a MSDN article An Introduction to the XML Tools in Visual Studio 2005 from July 2004!
Simply open the XSLT file with VS2005, set a breakpoint(s) as you would with .NET code, go to XML->Debug XSLT and you will prompted for a XML input file. Browse to your XML document to be transformed and away you go.