$textareaData = '<li>'.str_replace("\n","</li>\n<li>",trim($textareaData,"\n")).'</li>';
EDIT
Changed to get rid of all empty lines:
$textareaData = '<li>'.str_replace(array("\r","\n\n","\n"),array('',"\n","</li>\n<li>"),trim($textareaData,"\n\r")).'</li>';
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