While upgrading from v1.0 to v2.0 of an ClickOnce application, files/assemblies that have remained unchanged (have the same hash) across the update are not redownloaded from the server. Instead they are just copied over locally in the Clickonce store from the v1.0 to v2.0 app folder. This is totally transparent to the user except for the Dowload Progress Bar moving much quicker due to the local copy.

Keep in mind file patching is only across two versions of the same application i.e. the Deployment Manifest of the two applications has to have the same identity, modulo version.
Also the patching is at file level not the binary level, hence if only a few bits in a dll have changed Clickonce will still download the entire dll.

File Patching also works for assemblies downloaded using the DownloadFileGroup() APIs.

File Patching does NOT work currently for Data files (writeableType="applicationData").

Know Issue -
Our FilePatching model for assemblies (even strong assemblies) is based entirely on file hash.
Projects when rebuilt in VS often cause the same assemblies (exacly same source) to have different hashes. Hence if you are rebuilding your entire v2.0 solution its possible that assemblies that have not changed in terms of functionality will still have a different hash and hence be redownloaded by ClickOnce instaed of being copied locally.