^^^^^^^^^^^^"Specifies that any character flow object, except for U+000A (linefeed) characters, whose character is classified, before any linefeed-treatment handling is considered, as white space in XML (or any sequence of such character flow objects)
The default value of whitespace treatment + linefeed treatment (which just converts the linefeed to a single space) should result in:
"Here is sentence one. Here is sentence two.",
It will do so anyway, reagardless of the white-space-treatment, because by default whitespace is collapsed.