MSXML4 won't help in this case (for having XML files with XSL processing instructions embedded). This is because MSXML4 does not replace the older MSXML versions, but installs side-by-side with them.

If you want XML files with XSL processing instructions you will need to install MSXML3 (service pack 2 is the latest) and then switch it from "side-by-side" mode to "replace" mode.

Beware, installing MSXML3 in replace mode can, sometimes, break apps (including web/intranet ones) that are using the earlier versions of MSXML. It's all a bit of a mess, which is why MSXML4 only has a side-by-side mode.

MSXML3SP2:
http://msdn.microsoft.com/downloads/sample.asp?url=/MSDN-FILES/027/001/772/msdncompositedoc.xml

MSXML4:
http://msdn.microsoft.com/downloads/sample.asp?url=/MSDN-FILES/027/001/766/msdncompositedoc.xml

Tool for switching from "side-by-side" to "replace":
http://msdn.microsoft.com/downloads/sample.asp?url=/msdn-files/027/001/469/msdncompositedoc.xml

P.S. I have just discovered that if you install MSXML3SP2 is installs in replace mode anyway, meaning you don't need to switch from side-by-side mode
P.P.S. With the MSXML "service packs" they are in fact not patches as such, you don't need to install MSXML3 and then apply the service pack, you just need to install the service pack.