One way to solve this problem is to use an XmlTextWriter in a respective overload of XslCompiledTransform.Transform()
This instnce of XmlTextWriter must have its Settings property set with an instance of XmlWriterSettings for which you have specified whatever newline characters you want as the value of the XmlWriterSettings.NewLineChars property.
See: http://msdn.microsoft.com/en-us/library/system.xml.xmlwriter.settings.aspx
and
http://msdn.microsoft.com/en-us/library/system.xml.xmlwritersettings.newlinechars.aspx
