RizSilverthorn.net

For some unknown reason the creators of Zen Cart chose to not use an unordered list for the categories sidebox. Save the attached file as includes/templates/<current template>/sideboxes/tpl_categories.php (Note: link is now working again) and you'll have your sensible unordered list!
Once that is done go to admin -> Layout Settings and delete the entry in:

Categories Separator between the Category Name and Sub Categories

Finally, add something like the css code below to tidy up the display:

/* Categories sidebox */
#categoriesContent ul {
  list-style-image:none;
  list-style-position:outside;
  list-style-type:none;
  margin:0 0 0 10px;
  padding:0;
}
 
#categoriesContent ul li {
  margin: 3px 0 0 0;
  padding: 0;
}
 
/*#categories #categoriesContent a:hover, #categories .category-subs-selected {*/
#navColumnOne a:hover, #navColumnTwo a:hover, #categories .category-subs-selected {
  color: #CC0000;
}
 
#categories .category-subs-parent {
  color: #265780;
}