there has already been a long thread on this this week!
see the archives for the thread

 Re:  MSXML -> XSLT -> and bloody \r\r\n and where do they come  from? and what can I do about it!

Apart from the problem with newlines I'm surprised you get the output
that you state. (That output can not have come from the templates that
you posted)

 <xsl:template match="NODE1">
    <xsl:apply-templates select="//NODE2" mode="abc"/>
  </xsl:template>                        

For each NODE2 this applies templates to all NODE3 anywhere in the
document, so I'd expect that you get each NODE3 processed twice (as you
have two NODE2's)

  <xsl:template match="NODE2" mode="abc">
	<xsl:value-of select="*//NODE3"/>&#xD;
  </xsl:template>

This applies templates to each NODE3 that is a grandchild of NODE1
and in your sample input NODE3 are all children not grandchildren, so
this will produce no output.

David

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