Visual Studio 2005 is now out the door (Woot!) - For Windows CE developers this means that you now have one tool to develop native (Win32, MFC, ATL, STL, WTL) and managed (C#/VB, CF 2.0) applications - of course you can continue to use eMbedded Visual C++ 4.0 and Visual Studio 2003 (to develop .NET Compact Framework 1.0 applications).
Which version of Visual Studio do you need to develop Windows CE applications ? - The answer is the "Standard Edition", the express (free) versions don't ship with device development features - you can check out the Visual Studio 2005 Product Matrix for more information.
What about Windows XP Embedded ? - It's the same as the desktop version of Windows XP SP2, you can use any desktop development tool/language to develop applications for Windows XP Embedded.