I don't know the specifics for Xalan, but in general, if the next step in
your processing pipeline is a DOM application then it probably makes sense
to generate the transformation result as a DOM.

(Personally, I would search high and low for an alternative way of writing
the subsequent processing that avoided having to use DOM interfaces, but
that's just me.) 

> The expected benefit is:
> 1. avoiding reparsing of transformed output xml

Yes.

> 2. hopefully leverage the result tree that the transformer creates 
> internally i.e. no DOM tree creation from scratch
> 

The chances are that if you write to a StreamResult or SAXResult, the result
tree never actually gets created as a real tree in memory, so the answer
here is probably No.

In fact, using a SAX stream as the interface between the two processing
steps would probably work just as well as using a DOM.

Michael Kay
http://www.saxonica.com/