The problem is that the stylesheet path is being added only in the "Single Pass" and "Test UUTs" sequences, instead of both there and in the AddReportHeader sequence as in the original (release) reportgen_xml.seq file. The key thing to note is that what is displayed in the IE control within TestStand is only the contents of the Report object (e.g., what it might contain after a Reset or Load). It does not (in general) display the contents of the report file that is saved on disk (which would be what you would view from IE in Windows, outside of TestStand). The bottom line is that what you see in the IE control in TestStand and what you see in IE outside of TestStand are (in general) two different things.
If you look at the TestUUTs
sequence, the last step is a Load of the final report file that has been saved to disk. Because of this Load, in this case, viewing the Report in TestStand and in IE outside of TestStand yields the same thing. If you notice in "Single Pass", there is no such Load step. So in this case, the contents of the Report object in TestStand and the contents of the report file saved to disk (and viewed with IE) are two different things.
To solve the problem, I suggest putting back the "Add XML Prefix" step in the AddReportHeader sequence from the release version of the reportgen_xml.seq. This will add the processing instruction into the text contained in the Report object that will be displayed in the IE control in TestStand.