What is the current state of XSLT 2.0 availability within .NET
It is not supported by Microsoft and there hasn't been any anouncement I'm aware of. Where did you hear about that?
UPDATE (after you added the link to the XML Team Blog):
It seems that Microsoft changed their strategy according to this interview with Chris Lovett, a Program Manager on the XML team at Microsoft, later the same year, so it's all about LINQ:
As for XSLT 2.0 - we’ve heard fromcustomers and understand theimprovements in XSLT 2.0 over XSLT1.0, but right now we’re in the middle of a big strategic investment in LINQand EDM for the future of the dataprogramming platform which we thinkwill create major improvements inprogramming against all types of data.But we are always re-evaluating ourtechnology investments so if yourreaders want to ramp up their volumeon XSLT 2.0 please ask them to drop usa line with their comments.
If you want to use XSLT/XPath 2.0 with .NET you could use Saxon.NET. However, this is just the Java version of Saxon running inside IKVM. It has a significant size in the range of 30 MB and when I tried it the performance did not seem overwhelming (This was a very basic test though so the result might be different with a typical stylesheet).