It all seems to be working fine on DE for me (I'm on OS X though that shouldn't make a difference).
It's late, and no doubt I'm missing something but I don't understand the problem with the spaces between paragraphs problem. Most of the epubs I have use the normal html syntax (ie no break tags), and dsiplay as they should - ie the paragraphs flowing one after another without white space. The one exception is White Fang which uses CSS styles to give an extra margin at the beginning of paragraphs. If you need to have spaces between paragraphs that seems the better way to do it.
If you have any problems or issues with DE it would be well worth posting to the Adobe DE forum - in my experience the project engineers do seem to read and respond to posts and I'm sure they'd be happy to help.
Dale
OpenBerg is here (on Sourceforge)
http://openberg.sourceforge.net/