It seems that no-one has drawn the attention of the list to
http://blogs.msdn.com/xmlteam/archive/2007/01/29/xslt-2-0.aspx
Key points:
"[Microsoft's] users have made it very clear that they want an XSLT 2.0
implementation once the Recommendation is complete. A team of XSLT experts
is now in place to do this... The XSLT team will be putting out Community
Technology Previews (CTP) with the XSLT 2 functionality and appropriate
tooling as the implementation matures. The eventual release date and ship
vehicles (e.g. a future version of .NET or a standalone release over the
Web) have not been determined..."
"Those who urgently need an implementation of that runs in the .NET
environment may wish to check out the Saxon open source project or the
schema-aware commercial version produced by Saxonica"
Michael Kay
http://www.saxonica.com/
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