[chris2002]

It seems great, here's the full code page for you.

{* $Id: categories.tpl,v 1.26 2005/11/17 06:55:37 max Exp $ *}
{capture name=menu}
{if $active_modules.Fancy_Categories ne ""}
{include file="modules/Fancy_Categories/categories.tpl"}
{assign var="fc_cellpadding" value="0"}
{else}

{if $config.General.root_categories eq "Y"}
{assign var="_categories" value=$categories}
{foreach from=$_categories item=c key=catid}
<font class="CategoriesList"><a href="home.php?cat={$c.categoryid}" class="VertMenuItems">{$c.category}</a></font>
{assign var=in value=$c.categoryid}
{foreach from=$allsubcategories.$in item=c }<br />
&nbsp;&nbsp;&raquo; <a href="home.php?cat={$c.categoryid}" class="CategoriesList3">{$c.category}</a>
{/foreach}<br>
{/foreach}
{else} {foreach from=$subcategories item=c key=catid}
<font class="CategoriesList"><a href="home.php?cat={$catid}" class="VertMenuItems"><li>{$c.category}
</li></a></font><br />
{/foreach}
{/if}
{/if}
{/capture}
{ include file="menu.tpl" dingbats="dingbats_categorie.gif" menu_title=$lng.lbl_categories menu_content=$smarty.capture.menu cellpadding=$fc_cellpadding}

And you need to create a CSS with "CategorieList3" because it doesn't exist or use another one.
You have

 <li></li>

in the else section not in first one, maybe it's normal, because you gonna have a different display if you select to show the first categorie in the admin panel.

Thank you