I have the following stylesheet with a named template called
"convert_linefeeds" which converts CRLF's to new paragraphs of html. It works
fine when the named template is part of the stylesheet. However, I want to
reuse it in other places but when using import/include the template doesn't
work.

<xsl:when test="contains($input, '&#13;&#10;')">

                                    ^^^
The problem appears to be here. A conformant XML parser is required to
normalize CRLF pairs into a single LF (Actually it requires special
tricks to get a CR passed through to the reading application, look it
up in the spec). See
 http://www.w3.org/TR/REC-xml#sec-line-ends

Just try
 <xsl:when test="contains($input, '&#10;')">