Silverlightt 2 broke David Anson's Simple XPS Silverlight Viewer. The cause was that Glyphs.FontUri can longer load fonts from resources other than an assembly. Fortunately, silverlight applications can download other assemblies. So the fix is to package all the fonts used by an xps document into a separate downloadable XAP file. This solution is not optimal because:

1. Silverlight 2 appears to have trouble opening the xps file generated by xps writer. One has to unzip and rezip for Silverlight 2 to open it. See the comments in the middle of this page for more information.
2. One has to create an XAP file for each xps file to package all fonts used by the XAP file.

If you are willing to accept these limitations, yes, it is possible to view XPS in Silverlight 2. See the demo here. The source code may be downloaded here.