Testing has revealed that while the transformation succeeds on Mac, it fails on every browser on Windows.
While I remain hopeful that I am mistaken, I have concluded that CHARACTER ENTITY REFERENCES IN XSL FILE ARE NOT SUPPORTED ON ANY BROWSER IN WINDOWS (tested on Windows 7 Ultimate).
Yes strong words, yet upon replacing all character entity references with decimal entity references (e.g. @ replaced with &# 64; ) the transformation succeeded in every tested browser on both Mac and Windows.
I would be thankful for a demonstration that proves me wrong!
I appreciate that MSXML.DOMDocument.6.0 is quite stringent on validating DTDs, and inhibits it by default, but this matter is not applicable to the discussion at hand because the transformation was inhibited in all browsers and not exclusively IE. Also, the final code tested did not instantiate the MSXML.DOMDocument.6.0 ActiveXObject, so even in IE DTD-validation should not have been inhibited.
Thank you all for viewing, and to rnd_me for responding. Your constructive comments are welcome via PM as well as in this thread, though more likely to reach me via PM as this thread ages and the technology evolves.