I went ahead and re-did that. If you look at the site you can see it being done two ways. One way uses
<div id="hovertest"><ul>
<?php list_cats(0, '', 'name', 'asc', '', 1, 0, 1, 1, 1, 1, 1,'','','','','') ?>
</ul></div>
which has the problem that sub categories don't go under their parent.
The other way uses
<div id="hovertest"> <ul>
<?php wp_list_cats('sort_column=name&optioncount=1&hide_empty=1&children=1&hierarchical=1') ?>
</ul></div>
which does put the sub categories under their parent but when you rollover one the categories the entire group of categories is highlighted.
Also with the first way I lose the embedded lists so I don't think I could move them in a little like with the very top list.
The CSS
#hovertest ul{list-style:none; padding:0; margin:0;}
#hovertest li{color:#0f73af; display:block;}
#hovertest li:hover{background:url(images/hover.gif); background-repeat:repeat-y; color:#fff;}
#hovertest li a{color:#0f73af;display:inline;}
#hovertest li:hover a{color:#fff;}
#hovertest li:hover a:hover{background:none;}
I'm thinking that right now it isn't that big of a deal. It seems like I have to choose between what I prefer, or had orginally intended. Of course I'm still going to try to edit that category template page and see if I can get anywhere that way.
If you think you see or know something that I need to change or add (or remove) from the code I posted please tell.
Thanks.