Check to see how you have your filters setup. I have heard that you should setup TinyMCE without any other drupal filters attached to it.
My guess is that you are also using the HTML filter, which strips out extra line breaks. Try removing this filter from the setup and see if that helps.
Thank you!!!!
For some reason, I had it set to filtered html as the default input type, rather than rich-text editing.
All fixed now.
- jody