Here's a solution I got by editing your code:

    <xsl:template match="dummy">
        <xsl:text
disable-output-escaping="yes">&lt;lvText
val="&amp;#</xsl:text>
        <xsl:value-of select="@character"/>        
        <xsl:text
disable-output-escaping="yes">;"&gt;&lt;/lvText&gt;</xsl:text>
    </xsl:template>

Maybe it helps, though it's not very elegant...
Ileana

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