I had posted this a couple of months ago, but never got any response. Under iAS6.0, the transformer does not find my extension functions that are deployed and are in WEB-INF location. After going back and forth on this with iPlanet support, here's the final response from them.
"I built the sample application with the files that I received from you and was able to reproduce the problem. I dont know exactly for what reason our classloader is not able to pick the classes from the WEB-INF/lib with the sample application that I built with the files sent by you, but when I tried with my sample application which I had already sent to you everything works fine and the classloader picks the file from WEB-INF/lib. Anyway I have reported this problem with our engineering and filed a bug " Their sample application, BTW, did not use Xalan. Can anyone here help me out? The workaround seems to be to jar up the classes that implement the extension and all the classes they depend on in the jre/lib/ext directory. But this means having some classes in multiple locations.