XSLT was created to allow for document tree translation in an implementation independent manner. The main problem I have with this concept is that document translation is that 99% of the time you're doing it, it's to get the document to the format your app needs or from the format your app needs. In other words, the vast majority of translations depend on the implementation, so what's the point of an implementation independent translation language?
So on its own as a templating language, XSLT 1.0 had problems of varying size. The biggest by far was that the 1.0 spec had the absolute worst string handling of any language I've ever come across. It's erlang bad with the syntactic elegance of being an XML language. This is somewhat corrected in more recent versions but I think this is the primary reason the language has failed to gain adoption. If you're doing whole node manipulation, XSLT is adequate. It's not elegant, but it's flexible and I generally don't have problems getting the results I want in short order.
I do like a number of ideas present in XSLT, particularly the concept of templating documents as trees (guarantees well formed output) and transformation by pattern matching. Those both carry over into my preferred templating language, Python's Genshi, which some people like and some hate. To me it provides a good balance between purity and practicality.
As to your specific questions, I did one site in pure XSLT back in 2003-2004 and vowed I'd never do it again. I have a guy at work who really likes Symphony and produces good quality stuff with it. If I had to do PHP it'd actually be one of my top choices (I don't like PHP either...). I've never regretted learning xpath, since it seems to pop up regularly in unexpected places and isn't THAT complex. The complexity in xpath comes from many implementations not fully implementing the spec. HTML 5 has an XML encoding, so there's no reason that XSLT would work worse with HTML 5 than it does with XHTML.
XSLT will never be the one true path for templating, but its presence as a standard will always attract people who appreciate that sort of thing (I'm not one of those people) so it's not really a dead end either.