First, get rid of that ridiculous disable-output-escaping="yes". The element in question doesn't contain any characters that need to be escaped, but if it did, it would be quite wrong not to escape them.
I suspect that the spaces in the source document are actually non-breaking spaces (xA0). If your source document is encoded in iso-8859-1 and you're looking at it using software that only understands iso-8859-1, then the output document will contain the non-breaking-spaces encoded in UTF-8, which means they will display incorrectly if you look at them using software that doesn't understand UTF-8. Either get yourself a text editor that understands UTF-8, or produce the output in a different encoding, e.g. by writing <xsl:output encoding="iso-8859-1"/>.
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference