Widgets in WordPress 2.2

I have a question about my site https://www.nabloid.com. I installed the new wordpress 2.2 and it works great. However, when i go to use the widgets side menu, if I add my categories, it doesn’t show the children categories properly… it shows them as if they are regular categories, I want them to be shown as children categories like they are by default. Default they work fine. As soon as I try and use widgets, it doesn’t.

Help Please! Using Blix theme.