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@Sonist
Hmm I come around something like this every once in a while. Usually when dealing with HTML or already formatted word docs. What it sounds like is a problem with line feed (LF/11) and carriage returns (CR/13). Both create new lines but word does not really use LF they use CR to mark the end of a paragraph.
What you need to do is get rid of the LF and turn them into CR. Then run the remove extra paragraphs to get rid of the extra space.
1) Run "Tools|ASCII LF -> Word Paragraph"
2) Run "Tools|Remove Extra Paragraphs"
=X=
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