I haven't tried this yet, but it seems like this line should be the problem

<xsl:for-each select="$navigationNodes/child/* [@isDoc]">

Have you tried

<xsl:for-each select="$navigationNodes/* [@isDoc]">

I've removed a lot of the complicated xslt and ended up with this:

<?xml version="1.0" encoding="UTF-8"?>
<!DOCTYPE xsl:stylesheet [
<!ENTITY nbsp "&#x00A0;">
]>

<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
xmlns:msxml="urn:schemas-microsoft-com:xslt"
xmlns:msxsl="urn:schemas-microsoft-com:xslt"
xmlns:umbraco.library="urn:umbraco.library">
<xsl:output method="xml" />

<xsl:param name="startNodeId" select="/macro/startNodeId"/>
<xsl:param name="maxDrilldownLevel" select="/macro/maxLevels"/>

<xsl:template match="/">
  Startnode: <xsl:value-of select="$startNodeId"/><br />
MAxlevel: <xsl:value-of select="$maxDrilldownLevel"/><br />
<xsl:choose>
<xsl:when test="$startNodeId != ''">
    <!-- Start building the top navigation from the node supplied by start node id -->
    <xsl:call-template name="buildTopNavigation">
    <xsl:with-param name="navigationNodes" select="umbraco.library:GetXmlNodeById($startNodeId)"/>
    </xsl:call-template>
</xsl:when>
<xsl:otherwise>
    <!-- Start building navigation from top level node -->
    <xsl:call-template name="buildTopNavigation">
        <xsl:with-param name="navigationNodes" select="umbraco.library:GetXmlAll()"/>
    </xsl:call-template>
</xsl:otherwise>
</xsl:choose>
</xsl:template>

  
  

<xsl:template name="buildTopNavigation">
<!-- Start building the top navigation (first level navigation) -->
<xsl:param name="navigationNodes"/>
NAvigationnodes: <xsl:value-of select="$navigationNodes"/>
<ul class="mainNav">

  <xsl:for-each select="$navigationNodes/* [@isDoc]">
    a
    <xsl:variable name="currentProcessedNode" select="."/>
    <xsl:variable name="currentLevel" select="0"/>

    <!-- Check whether node should be visible in first level navigation -->
    <xsl:if test="string($currentProcessedNode/umbracoNaviHide) != '1'">
    <li>
      <!-- Build the navigation link using the node currently being processed in the for-each loop -->
      <xsl:call-template name="buildLink">
      <xsl:with-param name="node" select="$currentProcessedNode"/>
      </xsl:call-template>

<!-- Build next level navigation only if applicable -->

<xsl:if test="(count($currentProcessedNode/node) &gt; 0) and ($currentLevel &lt; $maxDrilldownLevel)">
<xsl:call-template name="buildNavigation">
<xsl:with-param name="parentNode" select="$currentProcessedNode"/>
<xsl:with-param name="level" select="$currentLevel + 1"/>
</xsl:call-template>
</xsl:if>

</li>

</xsl:if>

</xsl:for-each>

</ul>

</xsl:template>

<!-- A template used for building the non top navigation tree -->
<xsl:template name="buildNavigation">
<xsl:param name="parentNode"/>
<xsl:param name="level"/>

<ul>a
<!-- Iterate over the child nodes-->
<xsl:for-each select="$parentNode/* [@isDoc]">

<!-- Create var for easier reading/processing -->
<xsl:variable name="currentProcessedNode" select="."/>

<!-- Check whether node should be processed -->
<xsl:if test="string($currentProcessedNode/umbracoNaviHide) != '1'">

<li class="child">

<!-- Build the navigation link -->
<xsl:call-template name="buildLink">
<xsl:with-param name="node" select="$currentProcessedNode"/>
</xsl:call-template>

<!-- Build next level navigation only if applicable; recursive call -->
<!-- Still need to check whether all child nodes have been set to umbracoHideChildren = 1 whereas umbracoNaviHide = 0
this case would yield an empty ul element -->
<xsl:if test="
(count($currentProcessedNode/node) &gt; 0)
and (string($currentProcessedNode/umbracoHideChildren) != '1')
and ($level &lt; $maxDrilldownLevel)">
<xsl:call-template name="buildNavigation">
<xsl:with-param name="parentNode" select="$currentProcessedNode"/>
<xsl:with-param name="level" select="$level + 1"/>
</xsl:call-template>
</xsl:if>

</li>

</xsl:if>

</xsl:for-each>

</ul>

</xsl:template>

<!-- A template that builds our navigation link based on node properties -->
<xsl:template name="buildLink">
<xsl:param name="node"/>

<xsl:call-template name="buildNormalLink">
<xsl:with-param name="node" select="$node"/>
</xsl:call-template></xsl:template>

<xsl:template name="buildNormalLink">
<xsl:param name="node"/>



<a>
<!-- Set the href attribute, either the alias if available, else use NiceUrl() -->
<xsl:attribute name="href">
<xsl:value-of select="umbraco.library:NiceUrl($node/id)"/>
</xsl:attribute>
<!-- Set actual text for the link, either available from the properties or just plain umbraco link-->
<xsl:choose>
<xsl:when test="string($node/navText) != ''">
<xsl:value-of select="string($node/navText)"/>
</xsl:when>
<xsl:otherwise>
<xsl:value-of select="$node/nodeName"/>
</xsl:otherwise>
</xsl:choose>
</a>

</xsl:template>

</xsl:stylesheet>

But now i get this error when saving:

Error occured
System.OverflowException: Value was either too large or too small for an Int32.
at System.Convert.ToInt32(Double value)
at System.Double.System.IConvertible.ToInt32(IFormatProvider provider
at System.Convert.ChangeType(Object value, Type conversionType, IFormatProvider provider)
at System.Xml.Xsl.Runtime.XmlQueryRuntime.ChangeTypeXsltArgument(XmlQueryType xmlType, Object value, Type destinationType)
at System.Xml.Xsl.Runtime.XmlQueryContext.InvokeXsltLateBoundFunction(String name, String namespaceUri, IList`1[] args)
at (XmlQueryRuntime {urn:schemas-microsoft-com:xslt-debug}runtime, XPathNavigator node)
at (XmlQueryRuntime {urn:schemas-microsoft-com:xslt-debug}runtime, IList`1 navigationNodes)
at Root(XmlQueryRuntime {urn:schemas-microsoft-com:xslt-debug}runtime)
at Execute(XmlQueryRuntime {urn:schemas-microsoft-com:xslt-debug}runtime)
at System.Xml.Xsl.XmlILCommand.Execute(Object defaultDocument, 
XmlResolver dataSources, XsltArgumentList argumentList, 
XmlSequenceWriter results)
at System.Xml.Xsl.XmlILCommand.Execute(Object defaultDocument, 
XmlResolver dataSources, XsltArgumentList argumentList, XmlWriter 
writer)
at System.Xml.Xsl.XslCompiledTransform.Transform(IXPathNavigable 
input, XsltArgumentList arguments, XmlWriter results, XmlResolver 
documentResolver)
at System.Xml.Xsl.XslCompiledTransform.Transform(IXPathNavigable input, XsltArgumentList arguments, TextWriter results)
at umbraco.presentation.webservices.codeEditorSave.SaveXslt(String 
fileName, String oldName, String fileContents, Boolean ignoreDebugging)

So you're passing an extension expecting an int a bad value. Maybe here

<xsl:value-of select="umbraco.library:NiceUrl($node/id)"/>

Should be @id instead? Might be time for the debugger to see which line is throwing the exception.

Jeff: are you sure? that's not what I conclude from these examples: our.umbraco.org/.../xslt-examples-updated-to-new-schema

Yes, id is still an attribute of whatever element you have in the node variable, so you access it with '@'. I can see where that document might have gotten you though. NodeTypeAlias used to be an attribute of the data element, so you had to do 'data [@nodeTypeAlias='whatever']'. That one attribute is now an element and that was the big change (and a very nice one). Other attributes are still attributes though, so need the @.

To create this navigation:

I finally came up with this xslt:

<?xml version="1.0" encoding="UTF-8"?>
<!DOCTYPE xsl:stylesheet [ <!ENTITY nbsp "&#x00A0;"> ]>
<xsl:stylesheet
  version="1.0"
  xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
  xmlns:msxml="urn:schemas-microsoft-com:xslt"
  xmlns:umbraco.library="urn:umbraco.library" xmlns:Exslt.ExsltCommon="urn:Exslt.ExsltCommon" xmlns:Exslt.ExsltDatesAndTimes="urn:Exslt.ExsltDatesAndTimes" xmlns:Exslt.ExsltMath="urn:Exslt.ExsltMath" xmlns:Exslt.ExsltRegularExpressions="urn:Exslt.ExsltRegularExpressions" xmlns:Exslt.ExsltStrings="urn:Exslt.ExsltStrings" xmlns:Exslt.ExsltSets="urn:Exslt.ExsltSets"
  exclude-result-prefixes="msxml
 umbraco.library Exslt.ExsltCommon Exslt.ExsltDatesAndTimes 
Exslt.ExsltMath Exslt.ExsltRegularExpressions Exslt.ExsltStrings 
Exslt.ExsltSets ">

<xsl:output method="xml" omit-xml-declaration="yes" />

<xsl:param name="currentPage"/>

<!-- Input the documenttype you want here -->
<xsl:variable name="level" select="2"/>

<xsl:template match="/">
<!-- The fun starts here -->
  <xsl:for-each select="$currentPage/ancestor-or-self::* [@level=$level]/* [@isDoc and string(umbracoNaviHide) != '1']">
    <xsl:if test="$currentPage/@id = current()/@id or $currentPage/../@id = current()/@id or $currentPage/../../@id = current()/@id">
      <!-- output navigation Title -->
      <a class="leftnavtitle" href="{umbraco.library:NiceUrl(@id)}">
        <xsl:value-of select="@nodeName"/>
      </a>
      <ul>
        <!-- 1st navigation items -->
        <xsl:for-each select="./child::* [@isDoc and string(umbracoNaviHide) != '1']">
          <xsl:if test="$currentPage/ancestor-or-self::node/@id = current()/@id"></xsl:if>
          <li>
            <a href="{umbraco.library:NiceUrl(@id)}">
               <xsl:if test="@id = $currentPage/@id"><xsl:attribute name="class">selected</xsl:attribute></xsl:if>
              <xsl:value-of select="@nodeName"/>
            </a>
          
          <!--output 2nd level nevigation items -->
            <xsl:if test="count(current()/child::*
 [@isDoc]) &gt; 0 and $currentPage/@id = current()/@id or 
$currentPage/../@id = current()/@id or $currentPage/../../@id = 
current()/@id">
          
              <ul>
                <!--output 3rd level nevigation items -->
                <xsl:for-each select="./child::* [@isDoc and string(umbracoNaviHide) != '1']">
          
                <xsl:if test="$currentPage/ancestor-or-self::node/@id = current()/@id"></xsl:if>
                <li>
                  <a href="{umbraco.library:NiceUrl(@id)}">
                    <xsl:if test="@id = $currentPage/@id"><xsl:attribute name="class">selected</xsl:attribute></xsl:if>
                   <xsl:value-of select="@nodeName"/>
                  </a>
                </li>
                </xsl:for-each>
              </ul>
            </xsl:if>
            <!--end of 4th level children -->
            </li>
          </xsl:for-each>
        </ul>
      </xsl:if>
    </xsl:for-each>
</xsl:template>

</xsl:stylesheet>

Thank you Rik!

I needed:

and $currentPage/@id = current()/@id or $currentPage/../@id = current()/@id or $currentPage/../../@id = current()/@id"

For my level 2 check, awesome!