If you use the Java version of Xalan then you can easily switch to XSLT 2.0 by using Saxon 9 (
http://saxon.sourceforge.net/).
I don't know why your colleague claims XSLT 2.0 is a dead end, it has several implementations and work is one the way for XSLT 3.0.
The only dead end seem to be browsers which all only implement/support XSLT 1.0. But as a Xalan user you do not seem to do client-side/browser/side XSLT anyway.