XSLT outputting to XHTML to display character entities

Hi all,
Sorry if this is an FAQ, but I've looked and can't find info on it.

I have some non-7-bit characters in my source XML document, e.g. Ø
(O with slash).
My XSL stylesheet is processing the text and outputting it to an
HTML document.  I had wanted to output to XHTML, thinking that was
better than HTML.  For this reason I used
	<xsl:output method="xml" encoding="UTF-8" indent="yes"
	doctype-public="-//W3C//DTD XHTML 1.0 Transitional//EN"
	doctype-system="http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"/>
(I also tried encoding="ISO-8859-1".)

The result was that the non-7-bit characters were output in raw
form, not escaped, into the resulting (x)html.  This makes sense
for XML and is not unexpected.  However when I tried to view the
result in IE 6.0, the characters did not show up correctly.
(They appeared as a box, or as A~, depending on whether I set
encoding to UTF-8 or ISO-8859-1.)

When I change method to "html", the special characters were escaped
to &Oslash; and were displayed correctly by the browser.

My question, then, is: is IE failing to display XHTML correctly?
Isn't it true that XHTML (being XML) is allowed to contain any
Unicode data (except & and < of course unless escaped)?
And if so shouldn't a browser be able to display it correctly?
I know the browser doesn't lack the font for this character
because it shows up right when represented as &#160; in the html.

For now, it's not a problem to me... I can just use method="html"
and generate html.  But what's the Right way to do this?
Is there a way to generate XHTML using XSL and have special characters in
the output serialized using &#...; character entities?

Thanks,
Lars


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