This happens in your demo for Editor Office 2003 with IE 7
In the Full editor switch to HTML and enter:
Code: HTML/ASPX
<div class="quote">
line 1<br />
line 2<br />
line 3
</div>
Go back to Design view.
Paste any text at the very begining of line 2. It will paste but wipe out everything following the pasted text to the </div>
Found it originally in v6.0.65.2 which I think is the most recent.
Works OK in Firefox