> What's strange is while attempting to use variables to 
> represent document trees (a function of 2.0), changing the 
> version to 2.0 fixed a parse error.

If you specify version="2.0" when running an XSLT 1.0 processor, then it
runs in "forwards compatibility mode": it then doesn't report errors in
constructs unless they are actually executed and fail at run-time. This was
designed to make it easier to write stylesheets that run with multiple
processors implementing different XSLT versions.

Michael Kay
http://www.saxonica.com/