[xsl] processing of xml embedded in string

Here is the problem I am trying to solve.  I am quite sure this is (almost)
a FAQ, but my searches did not turn up anything useful, so here it goes:

The XML data I am getting back from another process contain is a container
that contains some embedded of a completely different kind.  What I want to
do is extract this and then process the contained XML as if it where handed
to me directly.  To give an example of what I get:

<str name="textfield">
&lt;p xmlns="http://www.tei-c.org/ns/1.0" xml:id="pT54p0286b2501"&gt;Some
paragraph content here, &lt;note&gt;with possibly other nesting
elements&lt;/note&gt;.&lt;/p&gt;
</str>

 <xsl:template match="str[@name='textfield']">
     <xsl:variable name="s">
     <xsl:value-of select="." disable-output-escaping="yes"/>
     </xsl:variable>
     <xsl:apply-templates select="$s"/>

<xsl:template match="tei:p">
    <p>
        <h2>TEI paragraph!</h2>
        <xsl:apply-templates/>
    </p>
</xsl:template>

 Christian Wittern
 Institute for Research in Humanities, Kyoto University
 47 Higashiogura-cho, Kitashirakawa, Sakyo-ku, Kyoto 606-8265, JAPAN