I think your fundamental problem is that your link does not have any content. Your image <img src="p1.png"> should probably be inside your link.
You should also think about using the :hover pseudo-class on the anchor rather than the li where possible. The anchor is the clickable region in this instance so it makes sense that only this should trigger the hover effect. (And IE6 only support :hover on the anchor element - if that is a concern.)
And welcome to WebmasterWorld :)
[edited by: alt131 at 5:26 am (utc) on Oct 3, 2011] [edit reason] Thread Tidy - Examplifying [/edit]