I find your indenting style confusing as well as problem statement. However, this appears to meet your requirements.

#!/usr/bin/perl -w
use strict;

while (<DATA>) 
{
   if (m|^\s*\<Content\>| ... m|^\s*\<\/Content\>|)
   {
      s/(\^M)+/\^M/g;                   #compress multiple ^M to one
      s/(\^M)/&lt;br\/>&gt/g;
      print $_ unless m|\<.?Content\>|; # don't print <Content>
                                        # or <\Content> lines
   }
}

=pod
THE ABOVE CODE PRINTS:
Some of the week's top stories:&lt;br/>&gt
EASTON AREA&lt;br/>&gt
BETHLEHEM AREA&lt;br/>&gt
CARBON, SCHUYLKILL AND REGION&lt;br/>&gt
have charged his mother's boyfriend, Paul Hoffman, with third-degree m
+urder. Officials said the charges were filed after an exhaustive inve
+stigation that showed Miller, who died Sept. 25, had the mental capac
+ity of a 12-year-old.&lt;br/>&gt
=cut

__DATA__
<ID>^M
<Number>124^M</Number>^M
        <Content>
Some of the week's top stories:^M
EASTON AREA^M
BETHLEHEM AREA^M
CARBON, SCHUYLKILL AND REGION^M^M
have charged his mother's boyfriend, Paul Hoffman, with third-degree m
+urder. Officials said the charges were filed after an exhaustive inve
+stigation that showed Miller, who died Sept. 25, had the mental capac
+ity of a 12-year-old.^M
</Content>
^M
^M
^M
^M
^M
        ^M
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