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You can replace tabs with markup by overriding
format_line().  The disadvantage is that doing smart
replacements (such as expandtabs() does) is more difficult
because there could already be markup in there which doesn't
count toward the tab stops.  You can accomplish Walter's
substition easily by overriding format_line().  This
substitution cannot be done at the front end because the
markup will be escaped and displayed.  I'm seeing this as a
supporting argument for making the tab filtering optional on
the front end (dependent on how much of a performance hit it
is to do it all the time).

I intend on making the default prefix class-level so that
different HtmlDiff instances share (and increment) the same
value to avoid anchor name conflicts between two tables
placed on the same HTML page.  Jim, does that help clarify?