It may help to know how the filter interprets line breaks (carriage returns).

A single return
like at the end of each line here
puts in a single line break--<br>
at the end of each line.

Text separated by two returns is interpreted as a paragraph. The text between sequences of two or more returns is put between <p> and </p> tags.

The filter doesn't try to interpret around HTML. For example, if you put in your own P tag preceded by a line break, you'll get <br><p> preceded by two line breaks, you'll nest one paragraph inside another:

<p><p>blah blah blah</p></p>

The filter's not particularly brilliant, but it tries to cover the most common quirks of text produced by humans. There's a WYSIWYG HTML editor in the Zone's future, but it won't be a panacea. I have yet to see a good one (defined as working as smoothly as a word processor like Word), because HTML was meant to be easy to display, not to write, and I cringe at the really crappy HTML they all produce. Still, for the routine stuff like bold and italic and inserting links, it should be a big help.