I haven't had time to read this enetire thread, but I've done a fair amount of retraining problem horses. I prefer to first fix all the body problems and then start with ground exerces - working off a halter - leading over rails in various patterns, than working them over rails with a short lunge line, then lunging, and finally double lunging -first off a halter, and gradulally introducing a bit that fits the shape of their mouth. When they can comfortably walk, trot, and canter, and spiral in and out, and work over ground rails on the double lunge, I start with short periods of mounted work - just like starting a young horse. Forget "dressage" until your horse is totally comfortable and thoroughly trusts you and your soft aids.
Equestrian art is closely related to the wisdom of life - Alois Podhajsky