I'm not certain - my XSLT is rusty - but I think I understand what you're asking for... and I'm afraid it's probably not possible.
XSLT transforms XML into XML. Your HTML is not XML (unless you're writing XHTML, which you're not!). So there doesn't - can not - exist an XML representation of it.
Here's how I'd fix it:
1. In your XML feed, use XHTML, not HTML. The fundamental difference is that all tags must be "closed". So an image tag doesn't look like <img src="..." alt="...">, it looks like <img src="..." alt="..." />, and a
looks like
. See how the tag has a "close self" slash at the end? That's the first thing you need (it's your
s that are affected.
2. Oh, and don't escape it! Escaping it makes it text. Same's true of a <![CDATA[ block if you were thinking of that. You need actual XHTML.
3. Now, in your XSLT, swap <xsl:value-of select="description" /> for <xsl:copy-of select="description"disable-output-escaping="yes" />. value-of shows the context of the text nodes within; copy-of copies the actual markup. Of course, this means your markup has to be valid XML, which is why you did steps 1 and 2.
I've tested that and it works for me. I don't do this, myself - too much work! - and instead just show a list of links, dates, and maybe some enclosures when I XSLT an RSS feed. But that's how you do it! Make sure you subscribe to your own RSS feed so you can see if you "break" it (it's very easy if you're having to remember to make everything valid XHTML!). (Another important XHTML rule is that you can't close an "outer" tag before an "inner" one, so no going <strong>...</strong>: they have to be closed in the reverse order that they were opened, every time!)
Finally: this may make RSS validators say your RSS is not perfectly-valid, because it uses tags that aren't part of the RSS spec! You might be able to get around this by adding the right xmlns:... to the header so say "XHTML tags are allowed too". But I wouldn't bother: so long as it works everywhere, who cares what a picky validator says?
Hope that helps: you're playing with black magic here! I've got to dash now but I'll check back in on this thread to see if it worked out for you.