<xsl:template match = "List">
   	<xsl:variable name="var">
		<xsl:apply-templates select="ListItem"/>
	</xsl:variable>
   	<xsl:value-of select="$var"/>
</xsl:template>

value-of gives the string value, ie strips out all the element markup.
use xsl:copy-of instead.

David


 XSL-List info and archive:  http://www.mulberrytech.com/xsl/xsl-list