I get the correct behaviour with Saxon 6.5.4 which is an XSLT 1.0
processor. Did something in XSLT 2.0 change that altered the behaviour
of XSLT w.r.t xml:space?
No, the rules in XSLT 2.0 haven't changed in this regard (though they have
been clarified). You've stumbled on a Saxon bug which appears to have been
present for quite a few releases - suggesting that not many people use
xml:space in stylesheets.
I'll write it up in the bug register on SourceForge as soon as I have an
accurate description of its effect.
Michael Kay
http://www.saxonica.com/
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