XSLT and XPath 2.0

Microsoft announced initially that their future strategy is to support XSLT 1.0, XPath and XQuery 1.0. They will not support XSLT 2.0.
Since the Recommendation in January 2007, several different announcements:

We are discussing whether to implement XSLT2 in the native stack (MSXML3 and MSXML6). The needs of IE are the biggest consideration (it uses the native libraries), and we will definitely coordinate with the IE team.

February 2007

As for XSLT 2.0 - we have heard from customers and understand the improvements in XSLT 2.0 over XSLT 1.0, but right now we are in the middle of a big strategic investment in LINQ and EDM for the future of the data programming platform which we think will create major improvements in programming against all types of data.

November 2007
Effectively their position remains similar to its earlier position
Major difference is that its enthusiastic support for XQuery 1.0 seems to be reducing.