1) how to embed html tags in a XML which will be processed by XSL?

Just type them in. Keep in mind that HTML tags, when embedded in an XML document, must meet the well-formedness test. For example you can't have this:

<ol>
  <li>banana
  <li>apple
  <li>grape
</ol>

in an XML document. You must close the tags like this:
<ol>
  <li>banana</li>
  <li>apple</li>
  <li>grape</li>
</ol>

All HTML attributes must be quoted:

<td width=0> ---> NOT LEGAL IN XML
<td width="0"> --> OK


2) Counter inside of xsl:for-each

No. Can't be done. Variables cannot change value once assigned. You will have to think of another way to do this that is in keeping with the "no-side-effects", declarative nature of XSLT.

3) Flag inside of xsl:for-each

See the answer to 2) above. 

xsl:for-each is not a looping construct. Its name resembles a common looping construct in procedural languages, but it's purpose in XSLT is different.
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This list works best when you tell us what you want to accomplish and show a sample of the input and desired output.
-- 
Charles Knell
cknell@xxxxxxxxxx - email