I just replicated this on my own site.
The display: block; has an implied break, so the <br /> at the end of every line adds another one. To remove that, find this section in /includes/templates/your_template/sideboxes/tpl_categories.php
PHP Code:
if (SHOW_COUNTS == 'true') {
if ((CATEGORIES_COUNT_ZERO == '1' and $box_categories_array[$i]['count'] == 0) or $box_categories_array[$i]['count'] >= 1) {
$content .= CATEGORIES_COUNT_PREFIX . $box_categories_array[$i]['count'] . CATEGORIES_COUNT_SUFFIX;
}
}
$content .= '<br />' . "\n";
}
}
if (SHOW_CATEGORIES_BOX_SPECIALS == 'true' or SHOW_CATEGORIES_BOX_PRODUCTS_NEW == 'true' or SHOW_CATEGORIES_BOX_FEATURED_PRODUCTS == 'true' or SHOW_CATEGORIES_BOX_PRODUCTS_ALL == 'true') {
// display a separator between categories and links
and remove the '<br />' . from
$content .= '<br />' . "\n";
leaving
$content .= "\n";
As long as cats are block (or too long for two to fit on one line) you will be fine.