This post is full of self-help realism, and completely lacks
explanation. That's for a reason -- I'm not near a reference work to
double check on the reason. :-)

> Specifically in XALAN-C processor.

I also don't have ready access to the Xalan-C processor, but using
`xsltproc`, I found it instructive to put content into the <dd>
elements and examine the output of the following two stylesheets. The
first is just like yours (except the do-nothing conditional is
removed), and the second is the same but with apply-templates instead
of value-of.

Input
-----
<?xml version="1.0" encoding="UTF-8"?>
<a>
  <dd>one</dd>
  <dd>two</dd>
  <dd>three</dd>
</a>

Test1
-----
<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
  <xsl:output method="xml" encoding="UTF-8"/>
  <xsl:template match="/">
    <xsl:variable name="a">
      <xsl:value-of select="//dd"/>
    </xsl:variable>
    <xsl:value-of select="count($a)"/>
    <xsl:text>: "</xsl:text>
    <xsl:value-of select="$a"/>
    <xsl:text>"</xsl:text>
  </xsl:template>
</xsl:stylesheet>

Test2
-----
<?xml version="1.0" encoding="UTF-8"?>
<xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
  <xsl:output method="xml" encoding="UTF-8"/>
  <xsl:template match="/">
    <xsl:variable name="a">
      <xsl:apply-templates select="//dd"/>
    </xsl:variable>
    <xsl:value-of select="count($a)"/>
    <xsl:text>: "</xsl:text>
    <xsl:value-of select="$a"/>
    <xsl:text>"</xsl:text>
  </xsl:template>
</xsl:stylesheet>

Output1
-------
<?xml version="1.0" encoding="UTF-8"?>
1: "one"

Output2
-------
<?xml version="1.0" encoding="UTF-8"?>
1: "onetwothree"

In both cases it seems as though $a contains only 1 thing, a string.
(You can test that it is not a node set by using $a in the select= of
a for-each -- you should get a runtime error, since it is a string.)

> So, my objective is to get the count() function to count the number of
> 'dd' elements.
> 
> test.xsl
> 
> <?xml version="1.0" encoding="UTF-8"?>
> <xsl:stylesheet version="1.0" xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
> <xsl:output method="xml" encoding="UTF-8"/>
> 
> <xsl:template match="/">
>   <xsl:variable name="a">
>    <xsl:choose>
>     <xsl:when test="1=1">
>          <xsl:value-of select="//dd"/>
>     </xsl:when>
>    </xsl:choose>
>   </xsl:variable>
>   <xsl:value-of select="count($a)"/>
> </xsl:template>
> </xsl:stylesheet>
> 
> 
> test.xml
> 
> <a>
> <dd/>
> <dd/>
> <dd/>
> </a>