Even though the PDFs obtained with both FOP versions look and print OK, when the one created with 0.95 is pushed through the FAX system, the image obtained contains dotted areas that correspond to white areas in the PDF created with 0.20.5. 
I posted the question to FOP forum and Jeremias Maerki helped me research the issue. If the PDF with problems is manipulated by :
changing /ColorSpace [/Indexed /DeviceRGB 1 <FFFFFF000000>]
 to:
/ColorSpace [/Indexed /DeviceGray 1 <FF00>
the dotted areas go back to be white areas. i.e. the problem is resolved by this change

When I asked him if I could make this change in colorspace from inside my XSL-FO he responded:
"If you want this kind of functionality, it has to be fixed in Java code
first.If you want to give this a try, the place to fix this is:
org.apache.fop.render.pdf.ImageRenderedAdapter.populateXObjectDictionary(PDFDictionary)
There, a check has to be implemented to see if all palette entries are
plain grayscale values (red, green and blue all the same) in which case
/DeviceGray can be specified instead of /DeviceRGB. And of course, the
palette entries need to be 8bit rather than 24bits then."

My expertise in manipulating colors and graphics is not big enough for me to make changes to this code. So, I hope someone with more knowledge could fix this bug.
Thank you