The XML and XSLT functions in PHP handle entities in the following manner:
Therefore, don't put entities in your included stylesheets. There may be a way that I am unaware of, and I'm pretty much posting this as a reminder to myself.
PHP.net comments 54777 (XML Catalogs for speedy DTD Resolution), 57274 (Local storage of XML entity catalogs), and Whump.com XML Catalogs are very important - great post - references not only Marc Liyanage, but also Christian Stocker (even though Marc's name is spelled wrong!).