Don't worry about the water/bubbles overflowing from the bubble diffuser at all. It always does this after a start-up and will stop after it's broken in. It also seems to repeat a mini-break in every time that you do a water change (my only complaint about this skimmer).
I don't think that it matters much how far the pump is submerged. I cut my pump tube just enough so that the pump can rest on the bottom of my sump without there being a constant drag on the tube from the weight of the pump.
I keep my bubble diffuser box completely out of the water with the bottom of the box just a hair above the sump water level. This worked best for me due to the height of the sump and the amount of adjustment on the hanger. Probably not possible as a HOB
but this is what I found worked best to cut down the micro bubbles.
As Troy said, make sure that the outlet hose only goes a short way into the diffuser. If it is shoved in there too far it will give you trouble. Once everything is adjusted right you'll be amazed at the amount of trash this thing will pull out of your water. Great skimmer but tricky on the initial set-up.
Edit: About the length of the tube connecting the pump to the skimmer, If I remember right, the instructions say that there is a minimum or a maximum depth that you have to keep the top of the pump below the water surface. as I was placing mine in a sump I just did what fit well and it works fine. As a HOB
you can control that exactly and I would set it up just like the instructions say to do it. That will give you one less thing to worry about when trying to get it working right. This thing will give you headaches getting it adjusted, but it's mainly due to not being broken in. Just give it some time to adjust on it's own.