line feed normalization in C14N

Hi, All!

I have a question about line feed normalization in C14N. The spec says 
that :

    http://www.w3.org/TR/2001/REC-xml-c14n-20010315#Terminology

    -  All whitespace in character content is retained (excluding 
characters removed during
    line feed normalization)  
   
    http://www.w3.org/TR/2001/REC-xml-c14n-20010315#DataModel

    If an XML document must be converted to a node-set, XPath REQUIRES that
    an XML processor be used to create the nodes of its data model to 
fully represent
    the document. The XML processor performs the following tasks in order:

   1. normalize line feeds
   2. ...

During discussion in xmlsec mailing list we came up with two possibilities:
    1) All '\r' characters from the document should be removed when 
document is parsed
    by XML processor.
    2) All '\r' should be converted to "&#D;" by the parser.

I would appreciate if someone can clarify this part of the specification.

Thank you in advance,
Aleksey Sanin