<!ENTITY nbsp '<xsl:text>&#x0020;</xsl:text>'>

that defines nbsp to be a normal space " " if you want an html nbsp you
want &#160; you could make that the definition of nbsp here, but I
usually find its as easy to type &#160; as &nbsp;

but for the rest it all looks fine, and you should get the namespace
in teh result. xalan is very heavily used it's hard to believe that
they have a bug here, although you could ask on a xalan-specific list.

David

 XSL-List info and archive:  http://www.mulberrytech.com/xsl/xsl-list