I tweaked the post/edit editor so that it preserves line breaks in the source code. Still not perfect, but better. The "feature" where it strips out lots of code you might enter by hand in Source view (classes, inline styles, etc...) still needs some work. I just have to decide how to handle things.
Also, since it's not necessarily clear, the enter key makes a new paragraph, wrapping the content in <p></p> tags and thus creating a double line break (although the size of this break can ultimately be determined through CSS on a page by page basis.) To get a regular single line break ( <br> ) you can use shift + enter.
There is now an 'embed media' button in the editor that gives you a dialog where you can paste in a URL pointing at some media to embed (e.g., YouTube, Blip, Hulu, Vimeo, SoundCloud, Flickr, etc...) Seems like YouTube videos are getting a strange size set on them - still trying to work that out.
Everytime I have to open the source code, I learn something, so I don't mind it at all.