Believe it or not, flash will count RETURN key strokes as what would otherwise be <p> tags in a dynamic text box. Easy in one sense, but hard when you're trying to play by the "rules." Try variations on <p> and <br> tags to get the breaks you want (though I'd rather just use RETURN myself).
I just grabbed your .txt file from my cache and put it into flash, and make sure that your text box is the following: Multiline (it is) and HTML (I think it is, too). Now, the only way I think your text is fu(k1ng up in your flash is you might have some formatting in the text box itself. Bear in mind you dont need any actual text in the box to have it still be on the page. Also, your variable call is strange to me, so I just changed it to:
Story1= blahblahblah....
and that loads it into the text box on an action script call. I think your problem lies in your flash movie and not the text file itself (it worked for me!)
Blended