Index: wp-includes/formatting.php
===================================================================
--- wp-includes/formatting.php	(revision 5845)
+++ wp-includes/formatting.php	(working copy)
@@ -63,9 +63,10 @@
 	$pee = preg_replace('/\n?(.+?)(?:\n\s*\n|\z)/s', "<p>$1</p>\n", $pee); // make paragraphs, including one at the end
 	$pee = preg_replace('|<p>\s*?</p>|', '', $pee); // under certain strange conditions it could create a P of entirely whitespace
 	$pee = preg_replace('!<p>([^<]+)\s*?(</(?:div|address|form)[^>]*>)!', "<p>$1</p>$2", $pee);
-	$pee = preg_replace( '|<p>|', "$1<p>", $pee );
+	$pee = preg_replace('|<p>|', "$1<p>", $pee);
 	$pee = preg_replace('!<p>\s*(</?' . $allblocks . '[^>]*>)\s*</p>!', "$1", $pee); // don't pee all over a tag
 	$pee = preg_replace("|<p>(<li.+?)</p>|", "$1", $pee); // problem with nested lists
+	$pee = preg_replace("|\n<p>(.+?)(</li[^>]*>)</p>\n|", "\n<p>$1</p>$2\n", $pee); // problem with nested lists
 	$pee = preg_replace('|<p><blockquote([^>]*)>|i', "<blockquote$1><p>", $pee);
 	$pee = str_replace('</blockquote></p>', '</p></blockquote>', $pee);
 	$pee = preg_replace('!<p>\s*(</?' . $allblocks . '[^>]*>)!', "$1", $pee);