If you don't flush the forks out, and turn them upside down, then "re-prime" the bottom end, it's easy to get it wrong. The air space on top of the fluid gives you a cushion of air to compress easily with the initial spring movement, before the damper rod starts restricting the damping action. In general, lower oil height gives a more supple ride at small movements. Your braking dive may increase just a little, but it will soften up the small movements, and your damping and spring action will be more closely matched. Can't speak to the spacer length, but BlackRain has the skinny on that.
Hope this fixes ya up!
Keep us updated, and we'll get ya squared away.