some more cleanup and tweaking. still not there, but pretty usable ATM

app/controllers/checkout_controller_decorator.rb

@@ -0,0 +1,22 @@
+# commented-out as this is too invasive at the moment 
+# (assumes paypal is the only payment method available in your store)
+
+=begin
+CheckoutController.class_eval do
+  
+  def edit
+    if (@order.valid? && @order.state == "payment")
+      puts "valid, processing"
+      if @order.payable_via_paypal?
+        puts "payable via paypal, adding payment"
+        payment = Payment.new
+        payment.amount = @order.total
+        payment.payment_method = Order.paypal_payment_method
+        @order.payments << payment
+        payment.started_processing
+        render(:partial => 'checkout/paypal_checkout')
+      end
+    end
+  end
+end
+=end

app/controllers/payment_notifications_controller.rb

@@ -1,29 +1,25 @@
-class PaymentNotificationsController < CheckoutController
+class PaymentNotificationsController < ApplicationController
   protect_from_forgery :except => [:create]
   skip_before_filter :restriction_access  
 
   def create  
     @order = Order.find_by_number(params[:invoice])
     PaymentNotification.create!(:params => params, 
-      :order_id => Order.number_eq(params[:invoice]).first,
+      :order_id => @order.id,
       :status => params[:payment_status], 
       :transaction_id => params[:txn_id])
 
     # this logging stuff won't live here for long...
 
-    logger.info("created PP Notification for order #{@order.number} (#{@order.id}). thread #{Thread.current.to_s}")
-
     Order.transaction do
       # main part of hacks
       order = @order
       order.payment.complete
       logger.info("order #{order.number} (#{order.id}) -- completed payment")
       while order.state != "complete"
-         logger.info("advancing state of Order #{order.number} (#{order.id}). current state #{order.state}. thread #{Thread.current.to_s}")
          order.next
          logger.info("advanced state of Order #{order.number} (#{order.id}). current state #{order.state}. thread #{Thread.current.to_s}. issuing callback")
          state_callback(:after) # that line will run all _not run before_ callbacks
-         logger.info("Order #{order.number} (#{order.id}) -- callback complete")
       end
       order.update_totals
       order.update!
@@ -32,5 +28,36 @@ def create
 
     render :nothing => true
   end
+
+  private
+
+  # those methods are copy-pasted from CheckoutController
+  # we cannot inherit from that class unless we want to skip_before_filter
+  # half of calls in SpreeBase module
+  def state_callback(before_or_after = :before)
+    method_name = :"#{before_or_after}_#{@order.state}"
+    send(method_name) if respond_to?(method_name, true)
+  end
+
+  def before_address
+    @order.bill_address ||= Address.new(:country => default_country)
+    @order.ship_address ||= Address.new(:country => default_country)
+  end
+
+  def before_delivery
+    @order.shipping_method ||= (@order.rate_hash.first && @order.rate_hash.first[:shipping_method])
+  end
+
+  def before_payment
+    current_order.payments.destroy_all if request.put?
+  end
+
+  def after_complete
+    session[:order_id] = nil
+  end
+
+  def default_country
+    Country.find Spree::Config[:default_country_id]
+  end
 
 end

app/models/order_decorator.rb

@@ -4,4 +4,12 @@
   def shipment_cost
     adjustment_total - credit_total
   end
+
+  def payable_via_paypal?
+    !!self.class.paypal_payment_method
+  end
+
+  def self.paypal_payment_method
+    PaymentMethod.available(:front_end).select{ |pm| pm if pm.name.downcase =~ /paypal/}.first
+  end
 end

app/models/payment_notification.rb

@@ -7,7 +7,7 @@ class PaymentNotification < ActiveRecord::Base
 
   def mark_order_as_paid
     if(status == "Completed")
-      logger.info "Order #{self.order.number} should be marked as paid now -- IPN status 'Completed'"
+      logger.info "Order #{order.number} should be marked as paid now -- IPN status 'Completed'"
       #order.update_attributes({:paid_on => Date.today, :status_id => Status.PAID.id}) 
     end  
   end