The "preserve spaces" option preserves strings of text that contain multiple consecutive spaces, in other words it won't achieve the effect that you want!
Have you tried checking the "treat each line as a paragraph" option in Calibre's TXT input dialog instead?
This option will place each line of text in its own paragraph, which is what you want.
If you then wish to remove the margin below each paragraph, in the look/feel options check "remove spacing between paragraphs". This option will also indent each paragraph. This is how most dead tree books are set, as it uses less paper, and is similarly useful for ebooks because you can fit more lines per screen.
Last edited by artificial; 06-15-2010 at 12:24 AM.