Please, please, please make this change! I have been up most of the night working on this. I have tried everything suggested to no avail. I have one last idea. I have modified both the js/tinymce/tiny_mce.js file and the wp-includes/js/tinymce/tiny_mce_gzip.php file as instructed. Now, I am not a programmer by any means. In fact, I'm only just now beginning to learn css. However it seems to me that if these two files work together in any way they have to not be fighting one another, so I went back into the js/tinymce/tiny_mce.js file and changed the top three parameters back to the original:
this.defParam("force_br_newlines", false);
this.defParam("force_p_newlines", true);
this.defParam("convert_newlines_to_brs", false);
and changed ONLY the fourth parameter to:
this.defParam("remove_linebreaks", false);
Then I went back to the wp-includes/js/tinymce/tiny_mce_gzip.php file and changed only a single parameter:
remove_linebreaks : false,
I don't know if it's going to work, but it's worth a shot.