(I would appreciate a direct reply as I am a digester
and am working with a tight deadline! Please remember
to cc the list as well though!)

I am trying to setup a template to handle MEDIA
elements, which can be images, video or audio. I am
trying to use a variable to store the actual img or
embed tag to use later on in placement of the media
file, but for some reason, the variable is coming out
empty. If I add some basic text in the variable, it is
captured and output as expected. So, it is just the
img or embed tags that are being ignored/omitted for
some reason...

Use <xsl:copy-of select="$media1"> instead or xsl:value-of.
Look into the spec for the difference.