The bug has been squashed. Forms can now be inserted normally.
There is a bug which causes the parent spreadsheet to be inserted when you try to insert a form. Google is aware of the problem and is working on a fix. Until it is fixed here is a workaround.
Visit the spreadsheet and choose Form -> Embed Form
<iframe src="https://docs.google.com/spreadsheet/embeddedform?formkey=dERfOHBsYmJja3pkSjZ0Y1lUWTZtdlE6MA" width="760" height="638" frameborder="0" marginheight="0" marginwidth="0">Loading...</iframe>
Then click Insert, select Spreadsheet Form. At the bottom paste the URL in red above in the box labeled "Or paste a web address here:"