A question came up on the Atom WG mailing list about whether or not the xml:base attribute applies to relative URI's contained within escaped HTML markup embedded in the feed.
For instance, consider the following example:
<content type="html" xml:base="http://example.org/">
<a href="index.html">The main page</a>
The HTML anchor tag in the content element contains a relative reference. Feed readers need to have some way of resolving the relative reference. Luckily, Atom allows the use of the xml:base attribute, which, according to the xml:base specification, covers relative URI references contained in the text content of an element.
So, to answer the question: Yes, xml:base applies to URI's in escaped HTML content. The resolved URI for the escaped HTML anchor tag is http://example.org/index.html.
Atom, xml:base and HTML Content