Saxon provides kickin' XQuery support. eXist is supporting XQuery as well, but I've not worked with it yet.
Have played with an embedded eXist some and found some annoying quirks (crap handling of namespaces, mostly) but as long as you don't ask anything too complicated of it, it seems to work very well. I haven't played with the 1.0 beta yet so they may have fixed the namespace issues (one of the big ugly ones is the "throw an exception because we haven't implemented this, but make it a generic exception with no explanation" type problem) I was hitting -- I never got a response on the mailing list to the problems though =/
-Brian
