Actually, there isn't anything I've run into that is not supported by the module.  The error you are getting is probably due to a typo, incorrect reference, or some xsl formatting issue in the called include.  See the error includes the line where it choke is coming from the xslt processor, not really DNN.  XSLT compile error at (8,4). See InnerException for details.

As far as I know the only constraints are due to your environment setup, and hosting provider.  Other than that, DNN supports whatever MS and Net allows, which is a lot, but not everything.  Now, in order to really understand what is causing the issue, give us the url of the feed, and example xsl and include files.  If they are 2 large, hook up with me using my email. 

As to the second question.  There is not much difference in the existing versions of the News Feeds (RSS) and XML/XSL modules.  Back in the development of early DNN, not much was understood about RSS in general, and I suspect the modules reflected the view that eventually, some differences would be needed, which is why there are two projects with different roadmaps.  Now, I've actually used the XML/XSL module to render newsfeeds, so it's really a matter of using what does the job.  Currently, I'm using the XML/XSL module to render feeds and an ImageLink navbar.  So, it's not really that much different for now.  Looking at the source, they both look very similar, but that's probably going to change in the near future.

Cheers,

iwonder