I have PHP configured so that magic quotes are on and register globals are off.
I do my best to always call htmlentities() for anything I am outputing that is derive
All of these answers are great, but fundamentally, the solution to XSS will be to stop generating HTML documents by string manipulation.
Filtering input is always a good idea for any application.
Escaping your output using htmlentities() and friends should work as long as it's used properly, but this is the HTML equivalent of creating a SQL query by concatenating strings with mysql_real_escape_string($var) - it should work, but fewer things can validate your work, so to speak, compared to an approach like using parameterized queries.
The long-term solution should be for applications to construct the page internally, perhaps using a standard interface like the DOM, and then to use a library (like libxml) to handle the serialization to XHTML/HTML/etc. Of course, we're a long ways away from that being popular and fast enough, but in the meantime we have to build our HTML documents via string operations, and that's inherently more risky.