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Created attachment 1668 [details]
Apparently XslStyleSheet.HandleImportsInInclude moves the input navigator from the root <xsl:stylesheet> element, so when later HandleInclude() checks the namespace to see if it is a simplified stylesheet it is checking the wrong node.
In the attached test case, you will get an exception saying "Could not resolve named template foo." because the included stylesheet is processed as simplified.
If you remove the <doc:template name='foo' /> it will work because then the first two nodes will both have xsl namespace so it will correctly be processed as a normal stylesheet.
Tested with 220.127.116.11 and git 8b1ef452.
Fixed in git master [b62bb26]. Thanks for the simple repro.