I'd use the inbuilt power of templates which do your recursion for you...

<xsl:template match="tree">
	<ul><xsl:apply-templates /></ul>
</xsl:template>

<xsl:template match="nav">
	<li><xsl:if test="boolean(@title)">
            <xsl:value-of select="@title"/>
          </xsl:if>
          <xsl:if test="boolean(@group)">
            <b><xsl:value-of select="@group"/></b>
          </xsl:if>
	<xsl:if test="boolean(nav)">	
		<ul><xsl:apply-templates /></ul>
	</xsl:if>
	</li>
</xsl:template>

This should go through the XML from the top and output a collection of
nested lists.

Ben


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