geoffe

Also this page:
https://codex.www.ads-software.com/Category_Templates

Perhaps this page:
https://codex.www.ads-software.com/The_Loop_in_Action

can help you out. See the entries under #4.

Can anyone point me to the code where %category% is interpreted to see if I can find a way to code the subcategories in?

WordPress does not find nor use an .htaccess file

The .htaccess file is used by the Apache web server to determine what rules need to be executed on any files requested from the directory in which the .htaccess file is found, as well as any subdirectories.

If you put the .htaccess file in your WordPress directory, it will affect any files requested of that directory or its subdirectories by any web user.

You create an .htaccess file by saving a text file as .htaccess

You should really look for a primer on htaccess. There are a billion out there but WordPress has their own. Again, .htaccess is not a tool of WordPress, it is used by the Apache web server software.

2 questions: what directory is WordPress installed in and what is found in .htaccess files?

I see. IE is more forgiving in structure of the markup. There are cleaner ways to code your CSS, but for simplicity in fixing this, try adding in these style rules:

#blogroll ul li {
margin: 4px 10px 4px 10px;
display: block;
background: url(images/bullet.jpg) no-repeat;
padding: 0 0 0 18px;
}
#blogroll ul{
background: #fff;
margin: 0 5px 0 0;
padding: 10px 5PX 15px 5px;
}
#blogroll ul li a{
display: block;
height:1%; /* IE WIN */
}
#blogroll ul li a:hover{
background: #F0F0F0;
text-decoration: none;
}

you should provide a link so we can see the display problem