carriage return handling in XML parsers

I am trying to understand the implications of what the
XML 1.0 spec says about End-of-Line Handling and would
appreciate some clarification from more experienced 
shoulders.

It would appear that given this section, it is never possible 
to get unaccompanied carriage return "characters" in the 
stream of information provided by an XML parser, be it
SAX or DOM, unless I encode these as character references
in the input file to the parser. Is this correct?

On a related note, assuming simple ascii files, if I now 
encode the carriage return as a character reference, and 
round trip the file through an XSLT identity transform, 
will the output file be identical or will the carriage 
return now be represented as a single <CR> byte?

Thanks
Michael