Advice: Editors that do "Pretty Formatting" / XHTML

My boss would like our Drupal site to have a WYSIWYG editor that will format "ugly HTML" into "pretty HTML". What does that mean?

The following, when inputted on a single line in the editor will somehow, magically?, go from:

<p>Text here</p><ul><li>Bullet 1</li><li>Bullet 2</li></ul>

To something like this (his ideal):

<p>
   Text here
</p>
<ul>
  <li>
     Bullet 1
  </li>
  <li>
     Bullet 2
  </li>
</ul>

I know that the spaces required to show the indenting will make this render differently -- I know. He would accept what Whizzywig does when it uses the XHTML output option here.

<p>Text here</p>

<ul>
<li>Bullet 1</li>
<li>Bullet 2</li></ul>

I have tried installing whizzywig into WYSIWYG to get the xhtml "styling" feature, but no amount of digging in the docs / .inc / .module / .js has shown me how to get whizzywig to load the xhtml.js.

Advice, gang? "Get a new boss" is not an option, nor is "Make your boss read up on HTML / XHTML." This aside, he is a great guy!!
1. Is there a particular editor that does this kind of "prettying up" on the fly like whizzywig does?
1b. Has anyone gotten whizzywig to load xhtml.js??
2. Is there a setting I should re-examine in input filtering that will do the same (heavy emphasis on doing this re-styling "on the fly")?

Thanks in advance for any pointers you can offer!

TC