For the problem with the deleted 'all' category, check this link.
http://64.233.167.104/search?q=cache:42RvRyqbg8QJ:www.pligg.com/wiki/index.php%3Ftitle%3DCategory_Management+
http://www.pligg.com/wiki/index.php%3Ftitle%3DCategory_Management&hl=en&ct=c lnk&cd=1&gl=us&client=firefox-a
If you don't want the 'all' category to show, check this link for the solution.
Category tree without "all" category
To create main and sub categories, go to admin, categories, and click on add a new category. When the category appears in the category tree, you will see a box above and below the category title. If you drag and drop a category in the top box, the category will appear above the category you dropped it into. Dragging and dropping into the bottom box will move the category below. If you drag a category onto the category name box of another category, it becomes a sub category.