This error is nothing to do with your XSLT code - it's a problem in your XML that's being reported by the XML parser.
>Invalid byte 1 of 1-byte UTF-8 sequence.
This probably means that the parser thinks the document is in UTF-8 encoding when it isn't. If you use a different encoding such as iso-8859-1 or Windows cp1252 then you need to specify this in the XML declaration at the start of the document.
Michael Kay
http://www.saxonica.com/
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference