[kube]

Try replacing this part of your code below...

{if $config.General.root_categories eq "Y"}
{foreach from=$categories item=c}
<a href="home.php?cat={$c.categoryid}" </a>
<font color="99cccc">{$c.category}{if not %categories.last%}&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n bsp;{/if}</font>{/foreach}
{else} 
{foreach from=$subcategories item=c key=catid}
<font color="99cccc">{$c.category}{if not %categories.last%}&nbsp;;&nbsp;&nbsp;&nbsp;&nbsp;& nbsp;{/if}</font>
{/foreach}
{/if}

With this...

{if $config.General.root_categories eq "Y"}
<span class="catnav">
{foreach from=$categories item=c name=thisloop}
<a href="home.php?cat={$c.categoryid}"{if $smarty.foreach.thisloop.last} class="navlastitem"{/if}>{$c.category}</a>
{/foreach}
</span>
{/if}

Check if it is okay. And if it is, then add this to your css file.

.catnav A, .catnav A:link, .catnav A:visited {
color:#99CCCC;
margin-right:20px;
text-decoration:none;
}
.catnav A:hover {
color:#FF0000;
text-decoration:underline;
}
.catnav A.navlastitem {
margin-right:0px;
}

Hope this helps.