We had the same problem with loosing spaces by co-writing a master-thesis using MS Office 2010, MS Office 2007 and Mac Office 2008. We eventually found out that the normal.dotm in the MS Office 2007 was corrupt. Just deleting the normal.dotm file was sufficient. Word generates a new proper one on next use. It's apparently not that seldom that a corrupt normal.dotm causes problems. The normal.dotm can be found in the <user>/application data/microsoft word/template. It's a hidden folder. Configure the file explorer to show hidden directories and files.