The answer to your first question is that it looks like a bug in the implementation of document() (the actually error is coming from XML::Parser because it is not able to open the file.) I'll have a look at adding a test case based on your example and see to fixing it for the next release. If you send me an email with examples of failing XML and XSLT then it will probably help expedite matters.

As to your second question you probably want to try setting the base argument to the XML::XSLT constructor to the location of your files.

/J\