Don Demcsak (DonXml) gave a BoF about Xslt2, XQuery and Saxon.net.  He covered what is and what is not included regarding these features in .Net 2.0.  XQuery is included in Yukon, but not the .Net framework 2.0.  This is because the specification has not been ratified, and Microsoft got burned the last time they released something based on an unratified specification with Xsl in IE 5.  Saxon.net seeks to make up for the lack of this feature.