I was reading a book on using PHP with XML and the author notes that
PHP's "internal" XML processor (SAX) processes documents node by node
(rather than reading the whole document into memory first).
You may be
able to find an XSLT processor that works the same way
(although I kind
of doubt it)
There was at least one that tried to process the document as a stream
(xmlGrep, evolved into Napa). It went away and its successor went into
a commercial product (XML Origin), although I do not know if it is still
quasi-streaming. Of course, it may not be possible to avoid storing the
entire document, depending on how the stylesheet works.
Here is a paper on streaming XPATH evaluation:
Streaming XPath Processing with Forward and Backward Axes
Charles Barton et. Al.
XSL-List info and archive: http://www.mulberrytech.com/xsl/xsl-list