A new Open Source project has been started to port Michael Kay's Saxon 8.0 (and hence XSLT2 and XPath2 at a minimum) to C#, at http://www.x2x2x.org/x2x2x/home/. This is some of the more exciting news I've heard in a while, especially as Microsoft itself has been VERY ambivalent about adopting XSLT 2.0, preferring instead to go with their own "custom" XML transformation technology in Longhorn.
If Saxon is ported to C#, this could very easily prove the foundation technology to get XSLT 2.0 onto Windows in a major way. While not perfect, XSLT 2.0 is considerably less verbose, easier to build extensions and capable of group filtering and manipulation far in excess of what version XSLT 1.0.