master.xml

<data>
  <entry>
 <caption mode="formatted">
    <p>A fairly long looking <a href="http://www.stackoverflow.com">caption with a link</a> that goes to an external site.</p>
</caption>
  </entry>
  <entry>
<caption mode="unformatted">
    <![CDATA[A fairly long looking <a href="http://www.stackoverflow.com">caption with a link</a> that goes to an external site.]]>
</caption>
  </entry>
</data>

master.xsl

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" xmlns:exsl="http://exslt.org/common" extension-element-prefixes="exsl">
  
  <xsl:include href="https://gist.github.com/andrewminton/6465924/raw/72d6f6833a282da5ef0d2a8aa22087f71150a59e/nodetostring"  />
  
  <xsl:output method="xml" indent="yes" />

  <xsl:template match="/">
    <xsl:apply-templates select="data/entry"/>
  </xsl:template>

  <xsl:template match="data/entry">
    <xsl:variable name="html-ready">
      <xsl:apply-templates select="caption/*"/>
    </xsl:variable>
    
    <!-- process contents of caption node-->
    <!-- stringify it -->

    <li>
        <xsl:copy-of select="$cap"/> //outside of attribute it works
        <img>
            <xsl:attribute name="src">/image/2/150/112/5<xsl:value-of select="@path"/>/<xsl:value-of select="filename"/></xsl:attribute>
            <xsl:attribute name="data-caption">
		    <xsl:call-template name="nodetostring">
                      <xsl:with-param name="node" select="$html-ready"/>
                      <xsl:with-param name="esc-dblq" select="true()"/>
    		    </xsl:call-template>
            </xsl:attribute>
        </img>
    </li>
    </xsl:template>
  
  
  
</xsl:stylesheet>