> <foo>
>   <pcdata>I am data 1</pcdata><newline/>
>   <pcdata>I am data 2</pcdata>
> </foo>
Yes and no.  <newline/> is not needed in XML.  ISO10646 includes 
characters which  unambigously represent line-breaks and paragraph breaks: 
U+2028 and U+2029.
<foo>I am data 1
I am data 2</foo>
Any conventions for handling whitespace in XML do not need to address
"hard returns".  If someone wants a hard return, they can mark it up
explicitly just using what XML already provides (by adopting ISO 10646).
Similarly, XML-DEV does not need to make up any conventions to handle 
no-break spaces (  or  ) or "hard spaces" (ideographic space 
does not collapse:  ).
Lets not make this more complicated than it is!
Rick Jelliffe
P.S. In the example quoted, I think probably <RCDATA> is a closer
description of the element rather than <PCDATA>.