Okay, now I'm even more confused. Is this article (http://www.w3schools.com/xhtml/xhtml_html.asp)* just fibbing when it says that a nested list like my original is 'correct' for XHTML? (NB my example does close the <li> for Item 1, after the <ul> which it contains.)

* I'm not saying that it's an authoritative source, but.