upgrade nonsensifies fill-paragraph

[ken]

For quite a while I've been using the highest upgrade of emacs available 
to RH/Centos 5.8, i.e., 21.4.  But because I wanted to start using 
webdav functionality in emacs, I scrapped that and downloaded and 
compiled version 22.1.1.  With this upgrade came problems (some of which 
I've encountered and had to fix in previous upgrades).  One of these is 
what "fill-paragraph" does.

I'll have a nicely formatted html unordered list, something like this:

<ul>
  <li>This is a longer line of text for a single list
  item.  We're going to use it to test to see how
  well
  word-wrapping works with this new version of emacs (22.1.1).  It's
  always a real pain to reformat list items so that they look nice.
 </li>
 <li>Another line of text is no problem just typing it in without
  editing anything which affects where the line-breaks are located.
  Everything is happy so far.
 </li>
 <li>Now a third line.  After typing in this, I'll move the point up to
  the first list item and try to reformat it with <kbd>M-q</kbd>.
 </li>
</ul>

Fairy readable, but I want to improve the first list item's formatting, 
so I put the point between the first "<li>" and its matching "</li>" and 
to M-q.  I get this:

<ul> <li>This is a longer line of text for a single list item.  We're
  going to use it to test to see how well word-wrapping works with this
  new version of emacs (22.1.1).  It's always a real pain to reformat
  list items so that they look nice.  </li> <li>Another line of text is
  no problem just typing it in without editing anything which affects
  where the line-breaks are located.  Everything is happy so far.  </li>
  <li>Now a third line.  After typing in this, I'll move the point up to
  the first list item and try to reformat it with <kbd>M-q</kbd>.  </li>
  </ul>

which is of course *much worse*.  And not how the previous version 
behaved (with exactly the same ~/.emacs).

The problem, I believe, has to do with emacs' definition of what 
signifies the end of a paragraph.  But I couldn't find any such 
definition.  Any help?