I was close to throwing temporarily the proverbial "towel into the ring" with respect to whitespace handling. However an offline IM chat with Jeremias and writing the response to Stephen's post encouraged me to take a different approach.
Instead of trying to understand whitespace handling on the basis of a detailed analysis of the spec I looked at it from the perspective: What outcome did the spec writers most likely wanted to achieve? Of course the result is just a bunch of (educated?) guesses on my part. But based on my guesses I have posted a revised algorithm on the Wiki which I hope: a) Deals sensibly with unresolved/unclear issues b) Gives consistent results in the generated output c) Moves most of the work into refinement and only leaves whitespace handling around formatter generated breaks to layout d) Is understandable by others However, I do admit it is at this stage a home cooked approach and certainly requires close scrutiny by others before any implementation into the FOP code base is attempted. Thanks Manuel