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When Producing XHTML Output With XSL Files, You Have To Use

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        The method="xml" is needed if you want XHTML valid output, "xhtml" is not a valid parameter.

The encoding="us-ascii" is needed if you want pound, euro, nbsp and any other html entities to show up correctly.

<xsl:output method="xml" omit-xml-declaration="yes" encoding="us-ascii"/>