Thanks Derek. What you want to do is set a class for each row. The code above isn't that code, you are looking for something like this:
<font class="CategoriesList"><a href="home.php?cat={$c.categoryid}" class="VertMenuItems">{$c.category}</a></font><br />
Change the font tag to a div tag, and then you can define a background image for the CategoriesList class using this:
background: url(images/imagename.jpg);
Make sense?