Nevermind, I think,
here is my new categories.tpl code and this seems to be working......
{* $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 $config.General.root_categories eq "Y"}
<div class="categories">
{foreach from=$categories item=c}
{if $c.order_by < 500}
<a href="home.php?cat={$c.categoryid}">{$c.category}< /a>
{/if}{/foreach}
</div>
{else}
<div class="categories">
{foreach from=$subcategories item=c key=catid}
{if $c.order_by < 500}
<a href="home.php?cat={$catid}">{$c.category}</a>
{/if}{/foreach}
</div>
{/if}
{/if}
{/capture}
{ include file="menu_cat.tpl" dingbats="dingbats_categorie.gif" menu_title=$lng.lbl_categories menu_content=$smarty.capture.menu cellpadding=$fc_cellpadding}