First, this process will work for any XML schema file, not just SharePoint files. I'm just using SharePoint as the case in this example.

All XML files, or just about every XML file I've run across so far, in Windows SharePoint Services (WSS) v3 & Mirosoft Office SharePoint Server (MOSS) 2007 is validated by SharePoint using the WSS schema file found in the 12 hive: %12HIVE%/TEMPLATES/XML/wss.xsd.

What's that %12HIVE%? It's a variable I add to my SharePoint environments making it easier to change directory to the 12 hive when I'm in a command prompt. I explained how to add this, along with other tips, in my SharePoint developer tips and tricks post.

Unfortunately the schema is wildly inconsistant (at least in Beta 2 Technical Refresh). For example, the <Feature> node expects an attribute Id, but the <Field> node expects the same attribute as ID (notice the capitalization of 'D' in both). Arg... what a PITA! Obviously intellisense would be a huge help in avoiding these minor syntax issues that will cause SharePoint to choke when validating the XML.

Adding an XML Schema To a Specific File In Visual Studio 2005
I think it is fairly common knowledge to most developers that you can specify an XML schema for a specific file in Visual Studio. To do this, when you have the XML file open, go to the Properties toolpane and click on the ellipses for the Schema field (see Figure 1), select the Add button in the XSD Schemas dialog, browse to the wss.xsd file in the 12 hive (location listed above) and OK out of the dialogs.

Figure 1 - XSD Schema field in the Properties toolpane when the active open file is of type XML

Now, if you go back to your XML file, enter a top-level node that's used in SharePoint v3 (such as <Feature>)you'll start to see intellisense in your XML files (see Figure 2)! Visual Studio will even add the SharePoint namespace... very slick!

Figure 2 - XML intellisense in action for SharePoint XML files!

There's only one downside to doing it this way: you have to add the wss.xsd file to every single XML file you're working with... and that's tedious. There must be a better way... ah... entering from stage-right: the Visual Studio XML Schema Cache!

Adding the WSS.XSD SharePoint XML Schema to the Visual Studio 2005 XML Schema Cache
First, this is fully documented in the MSDN documentation, so feel free to try this at home. You can tell Visual Studio 2005 to load the WSS.XSD SharePoint XML schema file everytime you create a new XML file. This way, you won't have to do the method detailed above (specifying the WSS.XSD schema for each and every XML file you work with). To do this, you add it to the XML Schema Cache... let me show you how to do this:

First, using Windows Explorer, navigate to [Visual Studio 2005 Installation Directory]\Xml\Schemas, copy the catalog.xml file and give it a new name... I like to use sharepointcatalog.xml. Now, remove all the <Schema> and <Association> nodes from the sharepointcatalog.xml file except for a single <Schema> node... we'll use this one as our template. The <Schema> node takes two attributes: href (the location of the XML schema to load) and targetNamespace (the namespace of the XML schema). You want to replace the values of the only <Schema> node with the location of the WSS.XSD file and the SharePoint namespace. When finished, save your file.

Here's what my complete sharepointcatalog.xml file looks like after making these changes:

   1:  <SchemaCatalog xmlns="http://schemas.microsoft.com/xsd/catalog">

   2:    <Schema href="file://C:/Program Files/Common Files/Microsoft Shared/web server extensions/12/TEMPLATE/XML/wss.xsd" 

   3:            targetNamespace="http://schemas.microsoft.com/sharepoint/"/>

   4:  </SchemaCatalog>

Now, to get this to take effect, you'll need to close and restart Visual Studio. Once you do so, when you create a new XML file, all you have to do is specify the SharePoint XML namespace (using the xmlns attribute) in the root element and you're set! This is easy to do... start typing one of the SharePoint recognized root nodes (such as <Feature>), add the xmlns attribute, trigger intellisense by pressing [CTRL]+[SPACE] and pick the SharePoint namespace from the list of XML Schemas loaded in the Visual Studio XML Schema Cache (see Figure 3).

Figure 3 - Selecting the SharePoint XML Schema

After closing the <Feature> node, you can now use intellisense for all nodes and attributes in the file as shown in Figure 4. Sweet!

Figure 4 - Intellisense in action with the SharePoint XML Schema!

» AC's SharePoint developer tips & tricks
» MSDN: Schema Cache 

[Updated 2/17/2009 @ 5p] : For even better IntelliSense (including Visual Studio 2008), check this out.