The problem I am having is specific to IE on Win2003
SP3. ... it only happens if I use client
side formatting with IE 6 or 7.

In your original post you said "the HTML is missing tags", so
I asked which elements (there are no tags in XSLT) are missing ?

To see the HTML generated and to check what is wrong with the XSLT output
in IE you want to use the "View XSL Output" option from the context-menu.
If you don't have installed these tools Google for that phrase and install it.

Personally I prefer to check client-side transformations (regardless
whether for TransforMiiX or MSXML3) with Saxon 6.5.5 first (because
its superb diagnostics) and only afterwards I use the browser for
testing.

Could you tell me how to generate HTML using xsl and
xml with IE. I could PM you the code if you like.

Maybe what I wrote above already answers this. If not, try to give
an example for _one_ menu which is not generated correctly by
posting the trimmed down XML and XSLT.