All spaces at the begining of a list item content are consummed by the parser.

To reproduce:

 
*<space><space><space><space><space>foo<space><space><space>bar<space><space><space>

will render in XHTML

 
<li>foo<space>&nbsp;&nbsp;bar&nbsp;&nbsp;&nbsp;</li>

According to me we should have a regular behaviour concerning spaces management, I mean which is not context dependant.
So as in underline and italic context for example,
we should keep all space in place.

Second we should not mix <space> and &nbsp; in render, for example if &nbsp; appears after bar, why <space> appear after foo?
I think we should only use &nbsp;.

preferred rendering :

 
<li>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;foo&nbsp;&nbsp;&nbsp;bar&nbsp;&nbsp;&nbsp;</li>