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I submitted to online w3c validator a page (xhtml 1.0 transitional) with nested <form> tags and it reported nothing about that. Now, i may be wrong but it looks like nested forms are not allowed. Certainly, firefox didn't work properly with them and i had hard time to track this problem down.
I had the same problem, nested html forms not reported as validation errors. In Mac Safari 3.1.2 they sort of worked but not quite and I too had a hard time tracking down the problem.