Altova, creator of XMLSpy, has started to release their XML engine for free. The download includes the XML validating parser, the XSLT 1.0 engine, the XSLT 2.0 engine (schema-aware) and the XQuery 1.0 engine, and can be used from COM, Java and .NET. Read this page for more information.
AltovaXML is slow and buggy. I don’t recommend it, based on our experience. We started with it in an application we did, and switched to Saxon instead. Our experience was specifically with XQuery.