Thanks to Catherine for this Frugal Baby Tip!
I got a newletter home from my daughter's school the other day, suggesting using Crisco shortening (the hard white vegetable shortening) in the hair overnight, with a showercap on. Evidentally it suffocates the lice, and makes the nits very easy to remove.
To remove the shortening you must use dish soap, a couple of times. Sounds like a good alternative to chemicals too!