I'm not seeing this step happen in IE11 and you're not testing that it does (which I think we could by asserting that we see a pointerover on target0 whose co-ordinates are inside of target1).

We had a thread on this specific scenario here http://lists.w3.org/Archives/Public/public-pointer-events/2013AprJun/0120.html but I don't think it was ever resolved!  The spec seems vague on whether this should happen, and IE doesn't appear to do it at all.  Let's resolve what the intended behavior is, then explicitly test for it here.