I need to create the following in the XML output:

<!DOCTYPE dmodule [
	<!ENTITY % ISOEntities PUBLIC "ISO 8879-1986//ENTITIES ISO Character
Entities 20030531//EN//XML"
"http://www.s1000d.org/S1000D_3-0/ent/xml/ISOEntities">
	%ISOEntities;
]>

The solution I found was this:

<xsl:text disable-output-escaping="yes">
	<![CDATA[
<!DOCTYPE dmodule [
	<!ENTITY % ISOEntities PUBLIC "ISO 8879-1986//ENTITIES ISO Character
Entities 20030531//EN//XML"
"http://www.s1000d.org/S1000D_3-0/ent/xml/ISOEntities">
	%ISOEntities;
]>
	]]>
</xsl:text>

Just wondering if there is a better way to do this.

That's best you can do if you really need an internal subset.
(using pure xslt, saxon has an extension to do this I believe)
Better perhaps is use
<!DOCTYPE dmodule SYSTEM "local.dtd">

Also I had some interesting results while using StylusStudio. without this
statement things would run in a flash, with it, it would take like a
minute to run. Seems like it was trying to go retrieve this external
entity. When running directly with Saxon I saw no difference in processing
time.

..dan