Dimitre's answer is very comprehensive and 100% accurate (as always) but there is one point I would add. When upgrading to a 2.0 processor, you have a choice of leaving the version attribute set to "1.0" and running in "backwards compatibility mode", or changing the version attribute to "2.0". People often ask which approach is recommended.
My advice is, if you have a good set of tests for your stylesheets, take the plunge: set version="2.0", run the tests, and if there are any problems, fix them. Usually the problems will be code that was never quite right in the first place and only worked by accident. But if you don't have a good set of tests and are concerned about the reliability of your workload, then leaving version="1.0" is a lower-risk approach: the processor will then emulate all the quirks of XSLT 1.0, such as xsl:value-of ignoring all but the first item, and the strange rules for comparing numbers with strings.