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 - weve heard from
customers and understand the
improvements in XSLT 2.0 over XSLT
1.0, but right now were 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.
But we are always re-evaluating our
technology investments so if your
readers want to ramp up their volume
on XSLT 2.0 please ask them to drop us
a 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).