XML & XSL: Entities

Entities like   a.o. are ommitted while XSL processing:

<?xml version="1.0"?>
<!DOCTYPE stylesheet SYSTEM "./DTD/entities.dtd">

<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
        <xsl:output method="html" omit-xml-declaration="no"/>
        <xsl:template match="/">
                &nbsp;
                <xsl:apply-templates/>
        </xsl:template>
</xsl:stylesheet>


output is: (html source)

        
                Test
        

[including whitespaces]

How to prevent them from being ignored?
Other question: is there a possibility to automatically resolve standard
entities like &nbsp; within DOMDocuments, or do we really have to write a
whole DTD for each document to use those entities? 
Entities and Encodings are very tricky in DOM, arent't them... ?

Any suggestions are apreciated.

thanks in advance
vivi