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Typically, people pass one of the input files as the source for the transformation and use the document() function to read in the other.
For a more detailed analysis of your code and specific suggestions about wasy to fix it, you're probably best off with the XSL-list at http://www.mulberrytech.com/xsl/xsl-list/, where it will be quickly reviewed by many people who know XSLT well.
Bob
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