The livediscussions block does not use the theme() callback function, so cannot be overridden by phptemplate functions.

Live Discussions calls the theme_item_list function directly, instead of passing it through the theming/phptemplate engine, like so them('item_list', $items);

Here is the patch (also attached):

Index: sites/all/modules/livediscussions/live_discussions.module
===================================================================
--- sites/all/modules/livediscussions/live_discussions.module   (revision 421)
+++ sites/all/modules/livediscussions/live_discussions.module   (working copy)
@@ -101,7 +101,7 @@
             $link_q,
             "comment");
         }
-        $block['content'] = theme_item_list($linktext);
+        $block['content'] = theme('item_list',$linktext);
         $block['subject'] = $_live_discussion_config['live_discussion_title'] ?
               $_live_discussion_config['live_discussion_title'] : 'Live Discussions';
       }