Re: Fancy categories not displaying
It is probably good practice to put {literal} {/literal} tags around your javascript if it is inline in a template - but not to help with validation issues. Instead, what that does is tell smarty to ignore your javascript - since smarty and javascript share some syntax, smarty can break apart your javascript by interpreting it incorrectly. (You don't need these tags for calls to external javascript files - smarty does not look in there.)
For W3C validation errors - I think you have two options - 1) Move the javascript to an external file instead of having it in-line or 2) Try surrounding the javascript with comment html tags so the validator treats it as a comment:
<script type="text/javascript">
<--<![CDATA[
your javascript goes here
]]>-->
</script>
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