Strange source formatting problem

Howdy y'all,

I have this strange problem in CKEditor 3 (latest version downloaded a couple of days ago) where the code view shows irregular formatting. See this pic:



Notice the strange spacing.

I can manually format it properly and commit it to the database just fine in the same state. But when I go to edit the data in CKeditor, the spacing issue re-appears again and even worse the data gets echoed on the page like this:

<p><p><br />
   This is a paragraph.</p><br />
<ol><br />
   <li><br />

      This is text</li><br />
   <li><br />
      This is text</li><br />
</ol><br />
</p>

Any ideas what I'm doing wrong?

Thanks in advance.